North America

Earnings Preview: Microsoft Q4 2016 (MSFT)

By: Craig Bowles

Overview

Microsoft, Corp. (MSFT) is slated to report 4Q2016 earnings after the close on Tuesday, July 19th. The earnings release is expected at approximately 4:00 p.m. ET with a conference call to follow at 5:30 p.m. that is webcast through Microsoft Investor Relations. A member of the Dow Jones Industrial Average, Microsoft has significant market influence and the potential to impact the broader market gauges.

msftP

Outliers & Strategy

Key measures:

  • Earnings Per Share (EPS): (If available similar to the last four quarters, Adjusted Earnings Per Share (EPS) & Non-GAAP Earnings Per Share (EPS) would be comparable to consensus.) The Street estimate is $0.58 (range $0.55 to $0.63). (Source: Yahoo! Finance) Consensus was $0.66 three months ago.
  • Revenues: Analysts expect a decrease of 0.2% y/y to $22.14 bln (range $21.71 bln to $22.58 bln).
  • Price/Earnings of 40.5 compared to a 5-year average of 15.8; P/Book 5.6 compared to a 5-year average of 3.9, P/Sales 5.0 compared to a 5-year average of 3.7, and P/Cash Flow 13.9 compared to a 5-year average of 11.2. Dividend yield of 2.6% compared to a 5-year average of 2.6%.
  • Analysts view Microsoft with 21 Buy, 7 Hold, and 3 Sell ratings. (source: MarketBeat.com)
  • Insider sold 8,102,768 shares during the last three months and 50,795,598 shares in the past year. (source: NASDAQ.com) The company is currently doing its second $40 bln stock buyback program after the first one expired in 2013. Microsoft announced in February 2015 that it plans to sell $10.75 billion in debt to fund buybacks despite having $92 billion in cash.
  • Microsoft is compared to other software and service companies with quarterly results possibly impacting Apple (AAPL), Google (GOOGL) and Oracle (ORCL).
  • Microsoft shares have shown a 1-day average price change on earnings of 6.13%. Options are pricing in an implied move of 3.78% off earnings.

Recent News

  • 07/12: Raymond James reiterated a Strong Buy rating on Microsoft after second-quarter PC shipment data showed positive demand in the US, according to a post on Barron’s.com.
  • 07/05: Nomura thinks Microsoft should make a solid commitment to HoloLens mass production, citing the “Windows Holographic” software being opened, according to a post on Barron’s.com.
  • 06/24: Deutsche Bank reiterated a Buy rating on Microsoft, after mulling over the bull and the bear arguments for the $26billion acquisition of LinkedIn (LNKD). MSFT’s cloud revs could reach 25% of total revs by FY18 but concedes that investors are certainly concerned about slowing growth at LinkedIn, according to a post on Barron’s.com.
  • 06/18: Sanford C. Bernstein argued that the deal isn’t pricey at all, given that LinkedIn stock was trading at a 41% discount to peers in cloud computing and the Internet. Citigroup sees the strategic rationale, but not $26 billion worth. The deal actually reduces Microsoft’s value by 3% after counting the financial synergies of the deal relative to its costs. Microsoft shares ended the week down almost that much —2.6%, according to a post on Barron’s.com.
  • 06/18: Canaccord said the LinkedIn deal will expand the total addressable market for Microsoft’s productivity tools, enhance the firm’s Office suite and sales tools with highly relevant professional content, and, prospectively, accelerate top-line growth, according to a post on Barron’s.com.

Technical Review

Microsoft is one of several large companies that moved higher the last couple of years after having been basically flat for a decade.  The stock reached $56.85 on December 29th, 2015 and tested that area again in April. The level is similar to where the dot.com boom found resistance. Point and figure technicians have a bearish price objective of $45. (Chart courtesy of StockCharts.com)

msftC

Summary

Microsoft’s new CEO and stock buyback program appear to have helped push the stock higher before valuations became a factor more recently. The LinkedIn purchase is generally viewed favorably by analysts. Over the past year, Microsoft has beaten and missed analyst consensus by an average of 5c. Estimize consensus for an EPS (or adjusted EPS) of $0.60 on revenue of $22.205 bln compares to analyst consensus of $0.58 on revenue of $22.14 bln.

 

DISCLAIMER:  By using this report, you acknowledge that Selerity, Inc. is in no way liable for losses or gains arising out of commentary, analysis, and or data in this report. Your investment decisions and recommendations are made entirely at your discretion. Selerity does not own securities in companies that they write about, is not an investment adviser, and the content contained herein is not an endorsement to buy or sell any securities. No content published as part of this report constitutes a recommendation that any particular investment, security, portfolio of securities, transaction or investment strategy is suitable for any specific person.