Microsoft - $25@share = 30% off

Well, this is my first Blog post, so I will try to keep it very simple:
If you'd like to get technical, just email me: jim.falbe@gmail.com  

I'm recommending buying Microsoft.

For those who know me this is kind of funny as I hate investing in technology companies.  Think about it.  Technology companies are here today and gone tomorrow; they flower and fade like grass.  Yesterday's magnificent ice hotel of Internet-connectivity, America Online, didn't last long when the sun of high-speed Internet dawned.   In comparison, there are boring companies like Coca-Cola.  Same ingredients, same business, and nobody gets excited about them.  Nobody thought Coca-Cola would change the world, but you are drinking the same fizzy pop that your grandparents drank and your kids and grandkids will likely drink it after you.  In short, technology companies aren't predictable - boring companies like Coca-Cola are.

With Investing, it's crucially important to know that the company you are buying into is going to be able to keep making money into the future (Assuming there is no Apocalypse or WWIII, of course), and the further forward you can look the better.  In my future posts, be prepared for boring companies!

Sometimes, however, exceptions do roll along: Microsoft is one of them.  Let's look at the numbers:

Earnings after Tax (Last 4 quarters):                            $21.7 B

Stock Market Valuation of Microsoft:                         $210 B

Cash on Hand (-8.5 Billion for Skype)                        $41.5 B

Amount you'd pay to buy the whole company:             $169.5 B
(Stock Market Val - Cash on Hand)

This means earning a 10.33-12.8% Return on Investment AFTER TAX, depending on how you do the math.  This is a Price-to-Earnings Ratio of less than 8.  Companies that have grown their earnings every year for the last 15 (save for 2009, year of the Great Recession), usually trade at a P/E of about 20.  2011 looks to continue this trend of earnings for Microsoft.  Feel free to look, but believe me that no other major company is priced this cheaply, though Intel may be a close second.  In addition Microsoft will pay you the Stockholder 2.5% on your investment in the form of a dividend.  Sadly, you must pay taxes on this money.  Microsoft is also buying back stock, which at these prices is a very good deal for you and you don't have to pay taxes on this increase of your wealth.  Please note that I did not talk about growth.  Microsoft doesn't need to grow for you to make a lot of money at these prices.  Any growth would be gravy, or nitrous oxide, depending on how you like to look at it.  Personally, I do believe Microsoft will grow, though I could be wrong.  At this price thankfully, I don't have to be right.

Now, why is Microsoft so cheap?  Well, people believe that Google is and will kill them online, that Apple and Google are and will kill them in Mobile, and that even Windows is doomed as people shift from PC's to Tablets and other devices.  This belief extends to thinking that Microsoft Office will die, businesses will cease using PC's, and that none of Microsoft's new initiatives: Windows Phone 7, partnership with Nokia, Bing, Xbox w/ Kinect, SkyDrive, Cloud Computing Options, Skype, etc. will be successful in anyway.  (Funny, that several of them already are successful, and that there is still no legitimate alternative to Windows or Office, but we don't we need to fight about this)  Maybe the naysayers are right, but in the meantime, Microsoft is reporting new records of income; and projecting even better things in the future.  I can't say Microsoft will be here in 20 years, but I think it has at least a few years of life left in it, especially at these prices.

My estimate on Microsoft's Intrinsic Value: 300 - 500 Billion Dollars
Current Market Price:                                210 Billion Dollars
Minimum Discount:                                    30%


In Stock Terms
Intrinsic Value:                35.50-60.00 @ share
Current Market Price:     25.00 @ share

Disclosure: My wife is long both Intel and Microsoft (She purchased both yesterday).  If Microsoft remains below 25.00 @ share, I plan to acquire more over the coming days for both our joint and my own accounts.

(My info comes from:  http://www.sec.gov/edgar/searchedgar/companysearch.html)

Happy Investing,
Jim