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It has been nearly three months since Microsoft‘s (MSFT) CEO Steve Ballmer announced his plans to retire. And Wall Street has clearly voiced its approval for this decision; during that time, MSFT shares have rebounded nearly 20%. But will the exodus of Ballmer really change Microsoft’s future prospects as much as shareholders are anticipating? Find out now.
Microsoft started as a basement operation with Paul Allen and Bill Gates selling simple computer programs for the Altair 8800 microcomputer. Only 10 years later, the company released the first retail version of Microsoft Windows, an operating system that would ultimately become standard on most home PCs. With the success of Windows as well as Microsoft Office, Microsoft has grown into a tech giant that brings in just under $78 billion in sales annually and has 99,000 employees worldwide.
In the first quarter the company saw strong growth in its commercial licensing business, particularly for its Office 365, Azure and Dynamics CRM Online software. So net income advanced 17% year-on-year to $5.24 billion, or 62 cents per share. Adjusted earnings were 63 cents per share, which trumped the 54 cents per share consensus EPS estimate by 14%. Meanwhile, revenue rose 16% to $18.53 billion, also beating the $17.79 billion consensus estimate. MSFT shares rose to a three month high after the company reported these results and have continued to trade in that range.
There are 127 companies in the Business Software and Services industry. Of those, Microsoft is second largest in terms of market capitalization. In terms of fundamentals, Microsoft’s 3% dividend yield also stands out by being the fifth highest, as does its 30.1% return on equity, which ranks sixth.
Microsoft also makes the top quartile in terms of sales and earnings growth. Microsoft’s main competitors are Apple (AAPL), Google (GOOG) and Oracle (ORCL). At time of writing this, AAPL and ORCL are D-ranked sells while GOOG is a C-rated Hold. Of the four, Microsoft has the strongest operating margin growth, earnings surprise track record and earnings momentum. Meanwhile, the other three are experiencing anemic buying pressure from institutional investors, which isn’t a good sign for the stocks’ risk-to-return ratio.
Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. MSFT, a Conservatively-ranked stock, has experienced a surge in buying pressure ever since CEO Steve Balmer announced plans to retire in the next several months. Confidence in MSFT stock was further bolstered by a 22% hike in Microsoft’s quarterly dividend and a new $40 billion stock buyback program.
So since the summer, MSFT has improved in my system from a D-ranked sell to a B-ranked buy as the stock’s Quantitative Grade improved to a B-rating. On the fundamentals side, Microsoft has managed to firm up sales growth and earnings growth (which are both B-rated) and its operating margin growth (which is now A-rated). So MSFT also receives a B for its Fundamental Grade.
As of this posting, November 18, I consider MSFT shares a B-rated Buy. In a matter of months, the company has managed to turn around its image so I now recommend this stock for new money.
Would you like to check the fundamentals backing up one of your stocks? For more stock grades, please visit my Portfolio Grader website!