Have you been paying attention to shares of Microsoft (MSFT)? Shares have been on the move with the stock up 5.1% over the past month. The stock hit a new 52-week high of $140.74 in the previous session. Microsoft has gained 38.5% since the start of the year compared to the 24.2% move for the Zacks Computer and Technology sector and the 36.5% return for the Zacks Computer - Software industry.
What's Driving the Outperformance?
The stock has an impressive record of positive earnings surprises, as it hasn't missed our earnings consensus estimate in any of the last four quarters. In its last earnings report on July 18, 2019, Microsoft reported EPS of $1.37 versus consensus estimate of $1.21 while it beat the consensus revenue estimate by 3.01%.
For the current fiscal year, Microsoft is expected to post earnings of $5.21 per share on $139.71 billion in revenues. This represents a 9.68% change in EPS on a 11.02% change in revenues. For the next fiscal year, the company is expected to earn $5.9 per share on $154.18 billion in revenues. This represents a year-over-year change of 13.3% and 10.35%, respectively.
Microsoft may be at a 52-week high right now, but what might the future hold for the stock? A key aspect of this question is taking a look at valuation metrics in order to determine if the company is due for a pullback from this level.
On this front, we can look at the Zacks Style Scores, as they provide investors with an additional way to sort through stocks (beyond looking at the Zacks Rank of a security). These styles are represented by grades running from A to F in the categories of Value, Growth, and Momentum, while there is a combined VGM Score as well. The idea behind the style scores is to help investors pick the most appropriate Zacks Rank stocks based on their individual investment style.
Microsoft has a Value Score of D. The stock's Growth and Momentum Scores are B and A, respectively, giving the company a VGM Score of B.
In terms of its value breakdown, the stock currently trades at 27X current fiscal year EPS estimates. On a trailing cash flow basis, the stock currently trades at 22.2X versus its peer group's average of 25.1X. Additionally, the stock has a PEG ratio of 2.46. This isn't enough to put the company in the top echelon of all stocks we cover from a value perspective.
We also need to look at the Zacks Rank for the stock, as this supersedes any trend on the style score front. Fortunately, Microsoft currently has a Zacks Rank of #2 (Buy) thanks to rising earnings estimates.
Since we recommend that investors select stocks carrying Zacks Rank of 1 (Strong Buy) or 2 (Buy) and Style Scores of A or B, it looks as if Microsoft passes the test. Thus, it seems as though Microsoft shares could have potential in the weeks and months to come.
How Does Microsoft Stack Up to the Competition?
Shares of Microsoft have been soaring, and the company still appears to be a decent choice, but what about the rest of the industry? Some of its industry peers are also looking good, including Progress Software (PRGS), Oracle (ORCL), and Cadence Design Systems (CDNS), all of which currently have a Zacks Rank of at least #2 and a VGM Score of at least B, making them well-rounded choices.
The Zacks Industry Rank is in the top 34% of all the industries we have in our universe, so it looks like there are some nice tailwinds for Microsoft, even beyond its own solid fundamental situation.
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