MICROSOFT CORP. $29 (Nasdaq symbol MSFT; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 8.8 billion; Market cap: $255.2 billion; Price-to-sales ratio: 4.2; Dividend yield: 1.8%; WSSF Rating: Above Average) is the world’s largest software company. Its Windows operating system runs 90% of the world’s computers. As well, the company’s Office suite of programs dominates the business-software field. Together, Windows and Office account for 60% of Microsoft’s revenue and 80% of its earnings.
Microsoft is working to cut its reliance on Windows and Office. For example, its new 10-year alliance with Internet search provider Yahoo! Inc. (Nasdaq symbol YHOO) will help both companies increase their share of the online advertising market.
In Microsoft’s second quarter, which ended December 31, 2009, it earned $6.7 billion, or $0.74 a share. That’s up 59.6% from $4.2 billion, or $0.47 a share, a year earlier. Revenue rose 14.4%, to $19.0 billion from $16.6 billion. The company spends around 11% of its revenue on research.
Microsoft launched Windows 7, its new operating system, in October 2009. Strong initial sales of Windows 7 were the main reason for the higher revenue and earnings. So far, home-computer users are the main buyers of Windows 7. However, business demand should improve with the economy. As well, the company will soon launch a new version of Office. That should help increase Microsoft’s corporate sales.
The company’s $3.7 billion of long-term debt is a low 1% of its market cap. Microsoft also holds cash of $36.1 billion, or $4.10 a share. That gives it plenty of flexibility to invest in new software. The company may also buy back more of its shares. It spent $3.9 billion on buybacks in the latest quarter.
Microsoft will likely earn $2.00 a share in fiscal 2010. The stock trades at 14.5 times that estimate.
Microsoft is a buy.
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