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Technology Stocks : How high will Microsoft fly? -- Ignore unavailable to you. Want to Upgrade?

To: John F. Dowd who wrote (71784)	7/27/2002 8:19:04 AM
From: John F. Dowd	Read Replies (3) \| Respond to of 74651

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.

To: John F. Dowd who wrote (71784)	7/27/2002 1:34:17 PM
From: jonkai	Read Replies (1) \| Respond to of 74651

The rules say when a stock you hold has a decline in market value that is "not temporary", you have to record the expense for the write-down, even if you have not sold the stock. I know I have some stocks trading below what I paid - I don't deduct them from my income this year the rules say you can put "investment gains" as a line item of your earnings statement, or take "one time" gains..... and the same with "investment losses".... MSFT chooses to use one rule for when it has "gains" and another rule when it has "losses", that is the point..... as warren Buffett quoted someone as saying.... it's not what is done that is illegal that is the shame of accounting, it's what is done that IS legal that is the real shame in corporate accounting...... anybody get the hint of what MSFT is doing here? and they are doing the same thing for employee option expenses.... they are using one rule to show you shareholders, and then another rule to show the IRS..... hello? jon.

To: John F. Dowd who wrote (71784)	7/27/2002 1:37:28 PM
From: jonkai	Read Replies (1) \| Respond to of 74651

And stock options are included in the share count used to calculate EPS already, as you probably know. and since you don't know, MSFT shows only a fraction of the options that are well in the money in their diluted earnings statements..... that is the point, they aren't showing the true amounts......they are using a method that allows them to cheat the system, legally.......... don't you think Alan Greenspan and Warren Buffett and Arthur Levitt know what they are talking about here???

To: John F. Dowd who wrote (71784)	7/27/2002 5:07:50 PM
From: Charles Tutt	Read Replies (2) \| Respond to of 74651

"I think MSFT gives away about 1-2% each year, but they buy back shares to offset it. So, if you look at the diulated outstanding share count, it's stayed flat for years." Huh? yahoo.marketguide.com Charles Tutt (SM)