Microsoft Up On Revamp; Is Enthusiasm Justified?

Investor's Business Daily

For the thousands of investors who've stuck with Microsoft as its stock moved sideways for years, Thursday's reorganization plan may have shot a glimmer of hope.

The stock rose 3% on the news to 35.69 — a 5-1/2-year closing high.

Will Microsoft (MSFT), one of the four horsemen of technology in the 1990s boom, gallop again

The software giant, along with Intel (INTC), Cisco (CSCO) and Dell (DELL), led one the greatest bull markets in history. From the middle of 1994, Microsoft raced more than 2,600% higher to its peak.

But the stock has yet to prove it's recovered its growth legs. Despite its recent run, Microsoft has gone nowhere since it hit a split-adjusted 53.98 on Dec. 30, 1999. The stock is still off its intermediate top of 37.50 in November 2007, right before the market fell apart, taking Microsoft and everything else down with it.

Some points to keep in mind:Growth. When you have $76 billion in sales, delivering the double- or triple-digit growth of a fast young company is hard. Yet that's the kind of earnings and sales pace typical of the market's best growth stocks.

Microsoft has produced steady, if plodding, growth. Its five-year average earnings growth rate stands at a respectable 12%. Also, its return on equity, a measure of how much income management can generate from available capital, was well above average at 38.2% in 2012.

But growth is slowing as consumers shift from PCs to tablets. In the last six quarters, earnings per share have risen by single-digit percentages from the year-earlier quarter five times and dropped once. Analysts tracked by Thomson Reuters forecast only a slight 3% rise for the June quarter.

Those same analysts expect full-year EPS to drop 1% before rising 11% in fiscal 2014.

Product momentum. The widely expected reorganization, announced by CEO Steve Ballmer, pares eight engineering groups to four, shuffling top managers and folding Microsoft's flagship Windows operating system for PCs and mobile devices into one group. Ballmer said he wants Microsoft to become a "devices and services" company, like IBM and Google.

Microsoft has dominated PC operating system software for decades, while its Office productivity suite also is a money spinner. But those products live in a desktop computer world that's in rapid decline.

Meanwhile, the company has been widely criticized for being late getting into highly lucrative new markets, like smartphones and tablets. Competitors like Google (GOOG) and Apple (AAPL) have been way ahead.

It is possible for sluggish giants to revitalize themselves, get back on a rapid growth track and make new highs in the stock market.

IBM (IBM) remade itself from a mainframe computer maker to a services company in the 1990s and saw its earnings growth and stock price soar, although the growth has slowed in recent years and its stock is underperforming the market again.

Google is a good example of a company with a hot stock that eventually languished but made a strong comeback. From the stock's closing price of 100.33 on its first day of trading Aug. 19, 2004, it soared to 747.24 on Nov. 9, 2007. As the bear market and financial crisis unfolded, Google lost two-thirds of its value.

But it's since come back and achieved new highs. Google shares closed Thursday at 920.24, a new record close.

The difference with Google: It's a younger company with consistent earnings growth, thanks to a still fast-growing core search business. And it continues to innovate — even if not always profitably. Its Android OS wireless system and Maps apps have made it a mobile giant player, which is key to its future revenue prospects.

Institutional sponsorship. Microsoft continues to be an institutional favorite. More than 4,400 mutual funds own it, roughly the same number that own Google and Apple. Funds own 38% of the float.

Among its holders are several top-rated funds managed by longtime managers with outstanding records. They include several Fidelity growth funds and Legg Mason Capital Management Opportunity Trust.

The number hasn't changed much in three years, though. Leading growth stocks usually see a rise in fund ownership, particularly among top-rated funds.

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