Microsoft Corp (MSFT) is my Stock Pick of the Week as well as one of September’s Most Attractive Stocks. This is the first time, that I can remember, that Microsoft ever made our Most Attractive Stocks list.
Like all of our Most Attractive Stocks the company has (1) high and rising economic profits (as distinct from accounting profits**) and (2) a cheap valuation. As shown in our report on MSFT, the company’s ROIC (a whopping 61.6%) is in the Top Quintile of all the companies we cover and its economic earnings are growing. At the same time, the stock’s valuation implies that MSFT’s profits will decline by over 20% and never grow again. In other words, the stock market is predicting a permanent decline of 20% in MSFT’s profits. The market is setting the performance bar quite low for MSFT.
- Our discounted cash flow analysis shows that MSFT’s current valuation (stock price of $24.73) implies that the company’s profits will decline by 20% and never grow again.
- The company achieved a 62% ROIC during its last fiscal year.
- The company has $43,292mm in Excess Cash, which we remove from our Invested Capital calculation. $43,292 million is over 20% of MSFT’s market cap.
For details on what causes the difference between Economic Versus Accounting Profits, see Appendix 3 on page 10 of our report on MSFT. See Appendix 4 to learn how MSFT increased NOPAT by cutting costs and increased its NOPAT Margin from 26.0 to 28.8%. See Appendix 5 for details on how MSFT grew Invested Capital slower than revenue and drove Invested Capital Turns higher. Appendix 7 (in the Return on Invested Capital section) shows how the company improved NOPAT Margin and rising Invested Capital Turns result in an increase in ROIC (from 53.3%% to 61.6%) and Economic Profit, which rose by $2,754mm.As per Investment Strategy 101 and How to make money picking stocks, MSFT fits the profile of a great stock to buy.