Microsoft Stock Evaluation
I. Profile
Microsoft Corporation
Microsoft Corporation (NYSE: MSFT and NASDAQ: MSFT) is an American public multinational corporation established in 1975 headquartered in Redmond, Washington, USA. The company deals in development, licensing and support of a variety of software products and services. Microsoft also designs and merchandises hardware and delivers online advertising to their customers. It operates in five main segments: Windows & Windows Live Division (Windows Division), Microsoft Business Division (MBD), Server and Tools, Microsoft Business Division (MBD), and Entertainment and Devices Division (EDD). Microsoft’s products include operating systems for PCs, servers, and phones; business solution applications; productivity applications; server applications for distributed computing environments; desktop & server management tools.
Since its initial public offering (IPO) in 1986, Microsoft has experienced consistent performance on the stock market. The company has created at least three billionaires over the years and an estimated 12,000 millionaires from its employees. In July 2013, Microsoft Corporation revealed that it was shifting from a software-oriented company to a devices and services company. This strategy is meant to reduce the company’s dependence on Windows OS as its main source of revenue and make it more in touch with customer needs and demands. As such, Microsoft Corporation will be divided into two major sections: customers and devices unit, and commercial enterprises unit.
Financial Situation
Year after year, Microsoft Corporation has managed to grow its revenues from US$73.7 billion to US$77.8 billion. In addition, the company has reduced its percentage of sales dedicated to income tax expense about 7.7% to 6.6%. This performance has enabled Microsoft Corporation to register a bottom line growth from a annual value of US$17.0 billion to US$21.9 billion at the end of fiscal year 2013. In its report released on October 24, 2013, Microsoft Corporation announced an overall quarter-over-quarter growth in its consumer & commercial business divisions. This represented a 7% decline in the Devices & Consumer Licensing division as a result of lower revenues from the Consumer Offices licenses and Windows OEM. This indicates slow acceptance of the company’s new subscription model. As such, Microsoft Corporation would need to introduce serious incentives for the customers in order to effectively compete with the free services to less-premium offered by Google and Apple respectively. Microsoft Corporation has registered a 1% decline in revenue from its Windows OS division in 2013 from 2012.
Microsoft Corporation continues to face significant competition from mainly Apple and Google which offer similar platforms, applications and devices. The competition has currently a larger user base and utilizes vertically-integrated business models to gain extra revenue from services incorporated with the hardware and software platforms. Also, product attractiveness has move from conventional mediums dominated by Windows OS to others like tablets perceived to have greater utility by consumers. While Microsoft remain the market leader with 68.4% market share, its main rival Apple in increasingly gaining market share and is currently at 19.7%.

Analysis Microsoft Corporation

1) Balance Sheet Common-Size
* As we can see in the Common-size Balance Sheet of Microsoft Corporation below, in general the assets don’t have too much special change in structure of common-size balance sheet. In 2009, cash and short term investment just accounted for 40.37% total assets but it was increased to 42.72% in 2010 and 48.54% in 2011. Of course it mean that Microsoft may be get more investment from investors in short term and will have more cash to reinvest in the future. One of other factor of assets is inventory, noticed that in 2011, inventories accounted for 1.26% of total assets, up to 0.85 in 2010 and 0.92 in 2009. This is probably bad news because it is usually a sign for less efficient inventory management.

* About liabilities and equity, noticed that in 2011 total liabilities represent 47.48% of Microsoft Corporation’s total liabilities and equity. This mean that company stockholders have provided 52.52% of the firm’s total financing and that creditors have provided 47.48% of the financing. In addition, long-term debt proportion increased from 2009 to 2011. In 2009, long-term debt provided 4.8% in 2009 and 10.96 in 2011.

* Overall, Microsoft Corporation is a growing company. Its assets increased 28.3% from 2009 to 2011 (from 77888 to 108704). Second, the percentage of total assets held in current assets grew from 2009 to 2011, as sign for increasing liquidity. Third the percentage of total assets in plant and equipment or other long-term assets declined from 2009 to 2001, a sign for Microsoft is becoming more efficient because it is using fewer long-term assets in producing sales. Simultaneously, sales increased over the same period. Finally, as mentioned, Microsoft has significantly increased the percentage of its financing from long-term debt. Generally, these are considered sign of a solidly performing company, but we have a long way to go before we can confidently reach that conclusion.

2) Common-size Income Statement.

3) Ratios.
a) Current Ratios
* Current Ratios of Microsoft = Current Asset : Current Liabilities = 2.6
* Current Ratios of Apple = 1.6
* When we stand on potential creditor, high current abilities is better because it mean that the firm have the ability, at least in the short term, to make payment. From a stockholders perspective, too much liquidity is not necessary a good thing. We can easily see that Microsoft has higher current ratios than their main competitor (Apple) – it could mean that management is being too conservative by keeping too much money tied up low risk and lo-yield assets, such as marketable securities.
b) Total Asset Turnover
* Total asset turnover of Microsoft = net sales(revenue) :Total Assets = 0.643
* In 2009 total asset turnover of Microsoft is 0.75 and in 2010 is 0.72.
* In 2011 Microsoft generated 0.64$ in sales for every dollar in assets. We can see that Microsoft total asset turnover has declined since 2009, this does not necessary mean that company’s management team is performing poorly. This declined may be a part of recession in recent years or could be due to a slow -down in business of Microsoft’s customer.
c) Total Debt Ratio
* Total debt ratio(2011) = Total debt : Total Assets = 0.47
* Total debt ratio of Apple = 0.34
* The total debt ratio for Microsoft is 0.47 which mean that 47% pf the company assets are financed with debt. The total debt ratio of Apple is lower than Microsoft. This ratio depends on specific company situation, their capital structure but obviously we can guess that Apple has a better financing strategy.

d) Return on Assets.
* Return on equity = Net income : Total assets = 21.2%
* This ratio means that if total asset is 100%, the earning which stockholders can get it is the 21.2%.
III. Analysis Company Stock
1) Company Stock Dividend

* From 2009 to 2011 company has a lot of change. It’s a happen base on a positive trend. Obviously it’s a clearly evidence for the development of Microsoft in recent years.
* We can see easily that the dividend pay for stockholder increase through 3 years. In 2009, Microsoft pay for stockholder 0.13$ per share quarterly, but it increase 23% to 0.16$ per share quarterly in 2011.
* The closing price is $26.27( at Nov 16, 2011)
2) Assumption

Base on the increase of dividend of Microsoft in recent year and some financial statement in the second part of assignment – we can make some assumption like that (calculate based on Mixed Growth Dividend Model)
* From 2011 to 2013 : Non Constant Growth Rate
* From 2014 to 2016: Non Constant Growth Rate
Assumption that growth rate and require rate of return will be:
+ Growth rate (g): 26%
+ Require of return: 32%.

So with the assumption growth rate is 26% we can forecast future value of dividend in some next years:

D(2014) = D(2013)*(1+g) = 1*1.26 = 1.26$
D(2015) = D(2014)*(1+g) = 1.26*1.26=1.58$
D(2016) = D(2015)*(1+g) = 1.58*1.26 = 1.99$

From 2015 to 2016 because it is non constant growth rate so we will choose its value randomly.

Time | 2011 | 2012 | 2013 | 2014 | 2015 | |
Dividend | $0.64 | $0.9 | $1 | $1.26 | $1.58 | |
Key variables | P0 | D1 | D2 | D3 | D4 | |

* Estimate intrinsic value in 2011.

P0 = D1(1+R) + D2(1+R)2+D31+R3+ P3(1+R)3

P3 = D4R-g = 1.58(0.32-0.26) = 26.3$.

P0 = 0.9(1+0.26) + 1(1+0.26)2 + 1.26(1+0.26)3 + 26.3(1+0.26)3 = 15.108$

Average Current market value of Microsoft in 2011 is $26.5 and intrinsic value in 2011 is %15.1.
* So the stock is overvalue, I will sell stock.