Two Cheers for Microsoft

I think I’m the only person who was impressed with Microsoft’s earnings. Why is everyone so upset? Profits were up 37%. The company beat the Street by two cents a share, and the stock is down. What I saw was a pretty decent report.

Yes, I know. They warned about big investments for the new versions of Xbox and Windows (Windows Vista). But so what? Those are going to hugely profitable, and not in the distant future either. We’ll start seeing the payoffs next year.

Let’s look at all the pluses. Xbox is still selling like a champ, and the Server Division is a big moneymaker. As much as people talk about Xboxes, servers are a much bigger business for Microsoft. In the Servers Division, sales were up 16%, and operating profit jumped 32%. On top of that, deferred revenue, which is a sneak peak at future sales, is running very strong.

I haven’t seen Microsoft this cheap in years. For FY 20006, the company expects EPS of $1.27–$1.32. That gives them a P/E of about 20, or an earnings yield of 5%–which is higher than any point on the yield curve.

I’m not going to pretend that MSFT is the earnings juggernaut it once was. But at this price, the shares are a solid value.

Posted by on July 23rd, 2005 at 9:11 pm


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