Another good post from Yahoo board showing how largely discounted MSFT is compared to its peers with respect to cash flow generation and how to calculate its real PE.
I see nutty posts here claiming $10 valuations... not sure where you went to business school, but at my mba school, they taught a different way to value companies.
At $45, I believe MSFT's mkt cap is about $250 billion, roughly.
MSFT holds $39 billion in cash. Another $14 billion in "equity investments". They have $5 billion in receivables. That's $58 billion in liquid assets.
I won't include the "unearned revenues" of $7.7 billion that MSFT gets to earn back into revenue over the next 12-24 months - since that's already either been collected or billed, and in the cash or A/R balances I've included above.
However, if you review the analyst day presentations (www.microsoft.com/msft), you'll find in the CFO's presentation that MSFT has not yet billed or recorded unearned revenues for over $5 billion in revenues they're contracted already. (i.e. years 2 and 3 of multi-yr annuity contracts).
And no debt. And i'm not even including things like property & things like that - this is just cash or cash equivalent. That's $63 billion. That's $11 per share already.
Now, the rest. $250B - $63B above leaves about $190 billion.
For their fiscal 2003 (7/1/2002 - 6/30/2003), MSFT expects to earn operating income (before ANY investment income or interest) of about $11.5 billion. Add in about $1.5 billion interest they earn on the cash, and then take out for taxes (32%) and you get net income about of $8.8 billion. That's a p/e of about 21 on this net income number.
More interesting, and IMO a more important measure is the cash flow per share (vs. earnings per share). In fiscal 2001, MSFT generated over $13 billion in operating cash flow. In fiscal 2002 just ended on 6/30, MSFT generated $14.5 billion in postiive operating cash flow. The price to cash flow ratio would be about 12.
I haven't done a discounted cash flow analysis, but I can already tell you based on the above that MSFT is trading at a significant discount to the S&P based on the DCF analysis. And believe me, when companies have to begin expensing options, every savvy investor (i.e. fund managers & pro's) will use DCF to value companies and not GAAP earnings.
Bottom line - MSFT is a strong buy, and not overvalued based on the above.
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