How high will Microsoft fly? Message Board

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Technology Stocks : How high will Microsoft fly?

MSFT 492.01

+1.3%

Nov 28 9:30 AM EST

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To: Bearded One who wrote (4515)	12/26/1997 9:03:00 PM
From: John F. Dowd	Read Replies (1) of 74651

A 6% bond at par has a future stream of cash earnings of 10x60=$600 before tax. Taxes depending on your bracket diminishes the return by (let's say) 30%. Now your bond yields $420 over 10 yrs. There is a market risk also as interest rates could go up and the value of the bond would go down but since this would have an adverse effect on the equity market as well we will call this concern a wash. Earnings Per Share for MSFT projected over next 2 years are 3.24 and 3.96 or a 22% increase in earnings yr/yr. Let us say they maintain this rather modest growth for 10 yrs the earning stream works out as 4.83,5.89,7.19,8.77,10.70,13.05,15.92,19.43=approx $93. Converting this to a $1000 we get approximately 8.33 shares or $8.33x$93=$775 and nobody has taxed it and that is why we like high tech growth firms. Given my temperament and tolerance for risk I opt for the MSFT scenario feeling that the 775/420(1.84:1) ratio is worth it. Notice by the way that the earnings in the 5th yr.(out of 10) is 7.19.Hmmmmm In all fairness we have to diminish the end result by a factor of 20% but if you are like me you will never sell your stock but wait to the pile is so big that you can sell out of the money calls at the end of the rainbow. So if you think MSFT is going to grow at 22% then it is priced just about right according to Bearded One's Law based on the 10 yr. scenario. But why assume the company is going to live only 10yrs. IBM, GM etc have been around for at least the term of a 30 yr. bond and if you take 30 yrs. at 22% per yr/yr growth the annual earnings attributable to the 8.33 original shares reach over $1000 per year. The problem of course is that the company does begin to mature and become cyclical and this flattening of the growth curve is pretty well documented in other treatises that are beyond the scope of this presentation!!!! To sum up: The value is returned to the investor in terms of a bigger and stronger company and isn't realized until he/she (note the political correctness there) sells and that is where the risk lies - in the selling. The bondholder knows what the value of the corpus is going to be in 10/30 yrs. whereas the equity shareowner doesn't really know but is betting on the company to produce a bigger corpus than what they began with. The beauty of a great company like MSFT is that in 30 yrs they are not called in but keep on growing and expanding without the encumbrane of a taxed stream of earnings. A bond has no chance on internal growth!!! Happy New Year After that I think I'll go and buy back those deep in the money calls I sold the other day

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