Microsoft Corp.

The company

Microsoft Corp. (MSFT) is one of the largest transnational companies developing software for a variety of computing machines such as personal computers, game consoles, pocketbook computers, cell phones etc., a developer of a software platform which is currently most widely spread in the world - the family of Windows operating systems.

The company's units also produce a family of XBOX game consoles, Zune portable players, as well as accessories for personal computers (keyboard, mouse etc). Microsoft products are sold to over 80 countries worldwide, its software has been localized in over 45 languages.

The company is headquartered in Redmond. The corporation's staff is about 90,000 people.

Investment idea

The company shows very strong fundamentals. The company's earnings and sales have systematically increased over the past year. Recently investors are increasingly more interested in the company's stocks. In addition, the company appeals investors due to rather high dividends.

Nevertheless, despite a significant improvement in fundamentals in the past 2 months, the company's shares significantly dropped and are clearly undervalued at this time. Technically, the share price rested on a very strong support at which aggressive buying has been repeatedly observed.

The company’s corporate (non-systemic) risks are at a minimum due to strong fundamentals. Major risks remain systemic in nature – deterioration of the economic situation in the U.S.

Potential trading plan

Since the falling sloping channel has been broken and the price bounced off a strong level as a sign of major players' interest in this share, I believe we can start considering inclusion of this share in our investment portfolio. The position could be scaled in either from current levels or around $25. A necessary condition for entry is buying at higher volumes.

I believe that the price is very unlikely to go (and stabilize) below $25 because large players' buying interest has been repeatedly observed at this level. The growth potential is targeted at 33.6 dollars.

The risk scenario involves either systemic downturn or sudden deterioration of the company’s fundamentals. We recommend putting an analytical stop-loss under 24.5 after the share stabilizes. To increase trading turnover, we recommend fixing part of the profits around resistance levels at $28-29 with a view of regaining the position later.

Recommended trading plan Entry $24.5 - $25.5; Target $33.6; Stop under $24.5 upon stabilization.

Short-term fundamental analysis

The company's earnings demonstrate high growth rates throughout 2010. In the last quarter the company showed maximum earnings for a couple of years.

According to estimates, the company will maintain record high earnings levels for 4 quarters to come. Accordingly, the operating year (based on quarters) will also register record results.

The company's 2010 sales also consistently grow. As analysts forecast, no decline in sales should be expected in the next 4 quarters.

Long-term fundamental analysis

In 2007-2010 the company's average annual earnings grew from 1.49 to 2.1 dollars per share. Given the positive dynamics and analytic forecasts, we expect the company to earn 2.56-2.76 dollars per share in 2010-2012.

Earnings grow in the context of a similar growth in the company's sales.

Short-term sentiment analysis

Over the past 3 months the forecasts of the company's earnings are consistently upgraded. It was significantly improved 2 months ago. However, the price hasn't reacted to this fundamental change.

Last year the company filed reports with figures better than expected. Its shares are regularly undervalued because fundamentally the company is stronger that analysts' (investors') expectations. The company is likely to be undervalued now as well.

No significant revisions took place last month.

Long-term sentiment analysis

The current target value that investors are focused on is $33.7. The target was significantly increased 2 months ago. Probable reasons include the company's positive reports. Today the likely Upside is at 32%.

74% of covering analysts believe that the company should be bought, 23% believe it should be held, and only one analyst expressed a negative opinion on the company. On the whole, this means a very positive sentiment among analysts in relation to this company.

Our target price by end of 2011 is within $30.9-$36.3.

The average estimated target is $33.6 or practically identical to investor expectations.

Financial Statement Summary