Adjusting Expectations On Microsoft Earnings (MSFT)

Software giant Microsoft Corporation (NASDAQ: MSFT) is set to report earnings after today’s close.  First Call has estimates pegged at $0.47 EPS and $14.78 billion in revenues.  As with most companies, the focus is going to revolve on what lies beyond tomorrow rather than what has happened.

First Call has estimates for next quarter pegged at $0.55 EPS and $17.96 billion in revenues, and the estimates for Fiscal June-2009 are $2.11 EPS and $66.51billion.  What we want to do is bring this expectation more in-line with today’s climate and you will see we are outlining this below.

Below is what the company gave for guidance at its last quarterly report in July:

• next quarter of $0.47 to $0.48 EPSon $14.7 to $14.9 Billion in revenues, while estimates were $0.49 EPS on$15.06 Billion in revenues.
• For Fiscal June-2009, the company guided to $2.12 to $2.18 EPS vs.$2.16 estimates on revenues of $67.3 to $68.1 Billion, compared toestimates at that time of $2.16 EPS and $67.3 Billion in revenues.

We are seeing the same trends everywhere in tech and large companies with lower guidance, lowervisibility, and lower confidence in the numbers.  For Microsoft to tryto make a different argument seems as though it would be heresy or justoff the mark.  We have been given every indication that PC sales aregoing to be softer than many were telegraphing just 30 to 45 days ago,and now the spillover has even been applied to video games and consumerelectronics.  We have seen various Christmas spending estimates go fromover $1,600 down closer to $1,400 per family (where that tally comesfrom may be alchemy).  In short, no company is immune. 

That being said, we will not be shocked at all if Microsoft ratchetsdown not just the December-end quarter (its 2009-Q2).  The low-end ofthe estimates for fiscal June-2009 is $1.96 and with a consensus of$2.11 EPS we would not be shocked if the company puts this closer to$2.00.  That would give it a forward earnings multiple of under 11.0 attoday’s $21.50 share price.

As far as what to expect on revenues, companies have been much moreready to offer their revenue guidance than they have net operatingincome guidance.  The $66.5 billion in projected fiscal-2009 revenueshas a low estimate of $64.17 billion, and we would not be shocked atall if the company lowered its target down to a new revenue range of$64 to $65 billion.  Frankly, we won’t even be surprised if the companybrings that number down even lower.

This is in no way a representation of what the company is doing or acall for major shortfalls and miscalculations, and it isn’t even based on the fears that Steve Jobs and friends at Apple (NASDAQ: AAPL) arebiting further and further into the O/S pie as Mac sales are growingcompared with PC sales.  The lower-bias here simply comes from theproblems that are broad-based and that are global in nature during thisslowdown.  We have called this environment an outright recession, whileofficials are still not making that note formally.  But the cuts arenot just in technology and are appearing everywhere.

And here is the tricky part.  Valuations are dirt cheap even if thesoftware giant guides lower.  You have never been able to buy theshares this cheap if you are new to the game.  The reality on top ofthat is that cheap stocks can get even cheaper.  We see it every day.If the company can convince Wall Street that it is holding its own andweathering this storm well, then that sub-11 P/E ratio might have been atemporary gift from the trading gods.

Jon C. Ogg
October 23, 2008