Sunday, October 03, 2010

Why Microsoft stock is not moving up?

In the past columns, we have looked at the balance sheets of several companies. In this analysis, we will take a look at Microsoft balance sheet. Let us see why Microsoft stock is not going up and is there is any prospect for it to go up significantly.

First, let us look at the top line. The overall revenue went up by about 6.8% compared to 2009 and about 3% compared to 2008. The operating income increased by about 18% compared to 2009. Let us look at division by division on how the growth looks like.

Windows & windows live:
Although the profits in windows & windows live went up by 26% compared to FY2009, the profit edged up only by 1.8% compared to FY2008. While some of this can be attributed to a weak economy, the growth of smart phones and the tablet platform may also be contributing to the slow growth.

Server and Tools:
Server and tools has done pretty well even in a tight economy increasing profits through FY 2009 and FY 2010. This division has contributed close to 5 billion in net income to Microsoft's bottom line.

Microsoft Business Division:
Microsoft business division's growth has been flat through FY 2008, FY 2009 and FY 2010. While some of the flat growth may be attributed to the new version of Office coming out, more likely than not, it is likely that the growth in this division will be in single digits.

Online service division:
Microsoft's online service division has been losing money and the gap has increased widely in FY2010. It lost 2.4 billion in FY2010 from 1.6 billion in FY2009. The increased loss is likely to be persist well into FY2011 and FY2012 as Microsoft/Yahoo partnership comes into play.

Entertainment and Devices Division:
It looks as though this division has finally turned the corner and has become profitable. It has generated 589 million in annual profit. I expect this profit to cross 1 billion in FY2011 with continued market share gains for XBox and also increased sales of the Kinect system for gaming.

Microsoft has an excellent cash position which is bolstered by additional debt. The main concern here is the use of cash. Microsoft has shown in the past that it is not very adept in using cash wisely. Thus the increased dividend is a welcome sign for the shareholders. However, the growth of long term debt is not encouraging as it increases the liabilities and weakens the company's otherwise strong balance sheet.

The main concern with Microsoft is the stagnant top line growth in its primary businesses of Windows and Office. The huge losses suffered by the online services division doesnt help the situation. The bright spot for Microsoft is the Server and Tools business. This is followed by the Entertainment and Devices division finally turning the corner.

Microsoft can increase the attractiveness of the stock to the shareholders by increasing the share re-purchase followed by increased dividend payout. As a top rated company, the payout will eventually get investor interest.

Sunday, June 20, 2010

Microsoft, Google, Apple, Yahoo revisited

In a previous article we looked at Microsoft, Google and Yahoo. In this article, we will look at these companies again. We have added Apple and Yahoo to the list to see how the tech industry is shaping up.

In the latest quarter, Microsoft had earnings of 4006 million dollars. After paying out dividends of 1139 million dollars for the quarter with a capex of 408 million dollars, Microsoft has a net accretion of 2459 million dollars. Microsoft also spent 143 million dollars for acquisitions which we wont include in this computation.

From the balance sheet, Microsoft has 39,666 million dollars in cash, cash equivalents and short term investments. Of this amount,~6000 million dollars is from short term, long term debt. Backing the debt out, Microsoft has approximately 33,666 million dollars in cash, cash equivalents and short term investments.

Google had a net income of 1955 million dollars in Q1 2010. Google spent 239 million dollars in capex in the same quarter. Google doesnt pay out any dividends - this left Google with a net positive cash flow of 1716 million dollars.

Google also has cash and marketable securities worth 26.5 billion dollars on the balance sheet. While this is not the same as Microsoft, the war chest is comparable in size while being off by about seven billion dollars.

Apple had a net income of 6452 million for the first six months of the year. Backing out the capex, the income averages to 2951 million dollars for the quarter.

Apple has cash, short term securities and long term marketable securities in the amount of 41704 million dollars.

Yahoo had operating income of 118.7 million dollars. The company had a capex of 70 million in the same period. The net cash flow was 48.7 million dollars in that period.

The company has more than 2 billion in cash and equivalents.


Microsoft has very robust revenue stream primarily from the windows and office franchises. The server and tools business has generated net income of about a billion dollars. The server and tools business is facing a well entrenched adversary in Oracle who recently bought Sun which gives it the range it didnt have before.

Apple is on the acendancy where the popularity of its iPhone platform has enabled it to gain market share with iPad tablets and also with Mac converts. Its overall cash balance is higher than that of Microsoft its net income is robust.

Google has a very strong balance sheet and continues to build its cash pile. Although it made a mistake in dealing with China, it has got a very strong international presence. Microsoft has 2 billion dollars yearly revenue from its online services division but is losing a dollar for every dollar in revenue. Google is closing in on 28 billion dollar in annual revenue which makes it about ten times bigger than Microsoft in the same space. Even taking over all of Yahoo's search isn't likely impact Google much in the search space. Google is increasingly becoming the dominant player in the mobile handset space by taking over market share with its Android OS. Android is expected to displace RIMM as the top OS in the smart phone space in the next three years.

Microsoft is competing in multiple markets and each of the markets, it is facing well entrenched competitors with huge war chests. The other companies are attacking Microsoft from the fringes which is likely to put increasing pressure on Microsoft's core franchises. The tech landscape is likely change significantly in the next several years with power shifting to different players in the tech space. This is likely to spur more innovation in the tech space and offer more opportunities to tech entrepreneurs.

Sunday, May 09, 2010

BH - Biglari Holdings, A turn for the worse?

Recently, BH (Biglari Holdings) which was renamed from SNS announced a new incentive package for the CEO and Chairman, Sardar Biglari. In the new scheme, the company plans to pay Mr. Biglari an incentive bonus of 25% of book value above 5% increase in book value every year. The matter is subject to share holder approval. Given that the name change to Biglari Holdings got 90% approval, it is likely that the change in compensation scheme will also pass shareholder approval.

Let us take a quick look at the financials to see why this deal is a good one for Mr Biglari but a bad one for the shareholders.

Looking at value line, the book value increased at 25%/year clip from 1994-1999 and at an 8.9% clip from 1999 - 2007 well before Mr. Biglari took over the reins of the company. Even if Biglari didn't do anything, BH is likely grow the book value at 8-10% pace/year. Since Biglari's compensation is tied to book value growth, the growth would have been limited to 20%/year from 94-99 and 7.9%/year from 94-99. The shareholders compounding rate will be limited because of this change.

More importantly, Biglari generated quite a bit of good will among investors for turning around SNS and improving the share holder value. However, Mr Biglari's recent actions have lost him some of the goodwill. He effected a reverse split and also named the company after himself. He will be facing headwinds moving forward. His current approach to incent himself and not have anything for his employees is likely cause problems downstream to retain talented employees.

His attempts to buy out itex and fmmh have been spurned. It is likely that future acquisition targets will continue to site the SNS case, the name change and then the compensation scheme on why future acquisitions are a bad value.

The company's intrinsic value is lower than what it was before the new incentive scheme. The company is fairly valued to slightly overpriced at current book value and taking into account the 2010/2011 estimated EPS of $15 and $18/share respectively. The EPS still likely not hit the highs of 2004-2006 at $20+/share. The compensation scheme and the fate of SNS post acquisition will reduce value for shareholders in this company.