This post provides updated Cash Management, Growth, Profitability and Value metrics and our Financial Gauge scores for Microsoft (NASDAQ: MSFT). The metrics were calculated using data in Microsoft's financial reports, including the 10-Q for the quarter that ended 31 December 2009.We have already examined the Income Statement for the December quarter, which was the second quarter of the company's fiscal 2010. Microsoft earned $0.74 per diluted share in this period, up from $0.47 per share in the same quarter of fiscal 2009.
Microsoft is best known for operating system and application software, but the company also sells video game consoles, music players, and computer peripherals. Windows 7 became available on 22 October 2009. The latest quarterly results produced the following changes to the gauge scores:
- Cash Management: 19 of 25 (up from 18 in September)
- Growth: 2 of 25 (down from 5)
- Profitability: 15 of 25 (up from 13)
- Value: 8 of 25 (down from 13)
- Overall: 47 of 100 (down from 54)
The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.
| Cash Management | 31 Dec 2009 | 30 Sep 2009 | 31 Dec 2008 | 5-Yr Avg |
| Current Ratio | 2.0 | 1.8 | 1.6 | 2.0 |
| LTD/Equity | 8.5% | 9.1% | 0.0% | 1.0% |
| Debt/CFO (years) | 0.3 | 0.3 | 0.1 | 0.0 |
| Inventory/CGS (days) | 25.1 | 30.8 | 30.8 | 38.5 |
| Finished Goods/Inventory | 0.8 | 0.8 | 0.7 | 0.7 |
| Days of Sales Outstanding (days) | 63.6 | 64.1 | 65.4 | 61.7 |
| Working Capital/Revenue | 35.2% | 31.8% | 22.7% | 48.7% |
| Cash Conversion Cycle Time (days) | -15.1 | -8.4 | -10.9 | -2.2 |
| Gauge Score (0 to 25) | 19 | 18 | 18 | 18 |
Microsoft added long-term debt to its capital structure for the first time in May 2009. The company then joined the elite ranks of non-financial entities with a AAA rating bond rating.
Total debt (short-term and long-term) is now about $6 billion, a pittance for Microsoft. To put the debt amount in perspective, the company has $36.1 billion in Cash, Cash equivalents, and Short-term investments. In addition, the average Cash Flow from Operations per quarter, over the last 10 quarters, is more than $5 billion.
Microsoft's reason for issuing this debt might have been to exercise the mechanisms through which the company could raise larger amounts of cash in the future, should the company decide, for example, to pursue a large acquisition.
The issuance of new Long-term debt bolstered Microsoft's Working Capital. As a percentage of Revenue, Working Capital is up over the last year but below the longer-term average.
We're curious about the Allowance for Doubtful Receivables, which has now surpassed $500 million. This allowance was below $200 million as recently as September 2008. Is a big customer having trouble making payments?
| Growth | 31 Dec 2009 | 30 Sep 2009 | 31 Dec 2008 | 5-Yr Avg |
| Revenue growth | -5.3% | -8.8% | 7.1% | 9.8% |
| Revenue/Assets | 79.4% | 76.7% | 93.1% | 78.1% |
| Operating Profit growth | 17.2% | 11.2% | 19.7% | 14.3% |
| CFO growth | 3.2% | 14.0% | -8.2% | 15.1% |
| Net Income growth | -5.7% | -22.5% | 1.6% | 9.5% |
| Gauge Score (0 to 25) | 2 | 5 | 11 | 15 |
The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.
Despite the good results of the most recent quarter, the Growth gauge score surprisingly weakened. The score could not rise because the trailing-year growth rates for Revenue and Net Income are still negative. The trailing-year growth rate for Cash Flow from Operations is positive, but 3 percent is tepid.
Fiscal 2009 was the first year in which Microsoft's Revenue was less than the year before.
Although Revenue/Assets recently bounced, this measure of efficiency is well below last year's level.
| Profitability | 31 Dec 2009 | 30 Sep 2009 | 31 Dec 2008 | 5-Yr Avg |
| Operating Expenses/Revenue | 62.8% | 65.9% | 64.7% | 63.5% |
| ROIC | 108.4% | 112.1% | 115.7% | 120.3% |
| Free Cash Flow/Invested Capital | 124.6% | 150.0% | 114.9% | 138.9% |
| Accrual Ratio | 12.7% | 11.7% | 0.1% | -3.3% |
| Gauge Score (0 to 25) | 15 | 13 | 12 | 17 |
Microsoft's Profitability metrics are always impressive, even if they don't quite match long-term averages.
Although Operating Expenses as a percentage of Revenue have been pressured by lower margins on software for inexpensive netbooks, cost-cutting actions announced at the beginning of 2009 have had the intended effect.
| Value | 31 Dec 2009 | 30 Sep 2009 | 31 Dec 2008 | 5-Yr Avg |
| P/E | 16.8 | 16.8 | 10.1 | 18.4 |
| P/E vs. S&P 500 P/E | 1.0 | 0.7 | 0.5 | 1.1 |
| PEG | 1.0 | 1.5 | 0.5 | 0.6 |
| Price/Revenue | 4.6 | 4.1 | 2.8 | 5.3 |
| Enterprise Value/Cash Flow (EV/CFO) | 11.6 | 9.2 | 7.6 | 13.7 |
| Gauge Score (0 to 25) | 8 | 13 | 25 | 15 |
| Share Price ($) | $30.48 | $25.72 | $19.44 | - |
Microsoft's share price continued to rebound during the December quarter, during which it registered an 18.5 gain.
Although not necessarily out-of-line when compared to Microsoft's historical record, the shares are clearly more expensive than one year earlier. The Value gauge has sagged as result of the resulting downward pressure.
The Value gauge had perfect 25-point scores after the December 2008 and March 2009 quarters. The share price was under $20 at that time. There was no way to know how the future would unfold, but the Value gauge certainly did its job.
| Overall | 31 Dec 2009 | 30 Sep 2009 | 31 Dec 2008 | 5-Yr Avg |
| Gauge Score (0 to 100) | 47 | 54 | 73 | 64 |
The Overall gauge weakened modestly because of the decline in the double-weighted Value gauge and the Growth gauge's reaction to negative year-over-year rates.
Full disclosure: Long MSFT at time of writing.
Posts
No comments:
Post a Comment