Stock Pick of the Week: Buy Microsoft Corp (MSFT) — Very Attractive Rating

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.

HIDDEN GEMS:

  1. 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.
  2. The company achieved a 62% ROIC during its last fiscal year.
  3. 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 and , MSFT fits the pro­file of a great stock to buy.

**See and Eco­nomic Ver­sus Account­ing Prof­its for more detail on why account­ing prof­its are not reli­able indi­ca­tors of cor­po­rate prof­itabil­ity or value creation.

Note: Stock pick of the week is updated every Tuesday.

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