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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Jurgis Bekepuris who wrote (18203)	12/18/2003 8:57:30 PM
From: Bob Rudd	Read Replies (1) \| Respond to of 78476

Jurgis: I'm not really an ROE investor but I decided to break it down and see why MSFT's ROE is declining. ROE breaks down into NetIncome/Revenues X Rev/assets X Assets/Equity. The most important part of that to me is the 1st componant, NetIncome/Revenues, since deteriorating margins are definitely a sign of problems. Looking out over 10 years I found margins have actually improved with net margin up from 24.5% 10 years ago to 31% last year. The steps along the way like gross margin, operating margin & EBT margin are also stable to improving. The main culprit to the decline in ROE appears to be the growth in assets since there's no net debt....and the asset that's really grown is cash from $3.6B in 94 to $49B in 03. So the problem is they're generating and retaining too much cash. The solution appears to be to gradually give it back by increasing dividends. Maybe I'm missing something, but I don't see too much cash as a deal killer.

To: Jurgis Bekepuris who wrote (18203)	12/18/2003 9:02:06 PM
From: jeffbas	Respond to of 78476

Since we are talking about growth stocks for a moment, FARO, which I recommended here as a value stock in March at $2+, was a buy recently under $20. Yahoo #13640 gives my outlook for 2006. Here is a comment I just made: finance.messages.yahoo.com There is no company whose fundamentals I like better. It is just a question of the price to own a piece of the company.

To: Jurgis Bekepuris who wrote (18203)	12/18/2003 11:52:14 PM
From: Mark Marcellus	Read Replies (1) \| Respond to of 78476

Jurgis, I don't think unadjusted ROE is a good way of looking at MSFT, unless you think the current high levels of cash are essential to their business. IMO, the cash has been kept as a cushion for the worst case scenarios in the anti trust actions. As that winds down, I think you'll see MSFT start to put that cash to work, either in dividends or in acquisitions (or both). Once the cash is distributed or put to work, ROE shoots up - assuming that MSFT isn't foolish enough to invest it in low ROE businesses. Meanwhile, as Bob point out, their enviable margins have remained pretty firm. Not to mention that the stock is currently trading at about 21 times 2002 free cash flow and 19 times 2002 operating cash flow. That certainly leaves some room to go down, but it's hardly what I would consider a bubble level. FWIW, I do agree that most techs are well into bubble land at this point.