The Investment U e-Letter: Issue #765
Thursday, February 21, 2008 Buying Stock in Microsoft: A Debt-Free Company That Wall Street Doesn't Appreciate… Yet
by Floyd G. Brown, Advisory Panelist, Investment U In times of uncertainty, it's increasingly important to be very selective when choosing companies to own. When I'm leery of the future, I look for stocks with lots of cash and quality, positive cash flows. To be sure, debt can help accelerate the downward spiral at any firm during a recession. We've already seen many debt-heavy companies fall to 52-week lows and below during the current credit crisis. It is amazingly simple to find the debt levels of different companies on the Internet these days. When you install any stock screener (there are dozens of stock screeners to choose from and most of them are free), you can enter an almost endless quantity of variables. Today, I'm looking for stocks with lots cash and no debt. The company who topped the list may or may not surprise you, but now may be the time to begin buying stock in Microsoft… Corporate America's Deepest Pockets When I screened for "show me stocks with debt less than or equal to zero," nearly 100 companies surfaced… in less than five seconds. Topping the list was: The next three names on the list were: I will pick Microsoft to analyze because it's been in the news lately. The company made an unsolicited offer to buy Yahoo! for over $41 billion. After all, the only reason Microsoft could even make such an offer is because it has no debt and has been sitting on a large cash hoard. The company doesn't have to worry about arranging financing for the deal. While Yahoo! has rejected Microsoft's offer, and News Corp and Google have been mentioned as possible white knights to help Yahoo! stay independent, most observers believe the deal will get done. Microsoft just may have to offer a slightly higher price. The deal makes sense for several reasons… Buying Stock in Microsoft - A Software Colossus Microsoft, as a software colossus, makes billions every year on its franchise position in the Windows operating system and office productivity software. They rake in big profits selling programs such as Vista, MS Word and MS Excel. The company has been using these profits to make investments in mobile computing, gaming and online services. But in online services, Microsoft badly trails Google, which is the leader in online search and applications. (If you ever want to be truly impressed by the innovations headed our way in the next few years, visit the website hosted by the Google research arm, Google Labs.) Microsoft has used its cash to invest in research, make strategic acquisitions, and to pay a dividend to investors. I like most of their uses for the cash, and I think that Wall Street truly under-appreciates the potential Microsoft has to grow earnings over the next few years - with or without Yahoo! Right now, Microsoft is trading at a price-to-earnings ratio of 15. Based on the company's expectations of yearly double-digit growth in 2008 and 2009, this is a very cheap stock. Revenue growth is projected at 15% to 16% over the next two years. In the current difficult economic times, Microsoft should continue growing profits as much of its revenue increases are coming from abroad. The Microsoft franchise extends far beyond the borders of America. What If Microsoft Acquires Yahoo? Should Microsoft be successful in acquiring Yahoo!, long-term profits would get a significant boost. Microsoft says that the expected savings alone will be over a billion dollars. But a Microsoft-Yahoo! combination also makes strategic sense. It would enable the software giant to become an online giant, too - in search, advertising and online applications. In 2007, Yahoo! generated sales of around $7 billion in 2007. Combined, Microsoft and Yahoo! online revenues should be over $10 billion. And the bottom line would look good, too… Profits at Yahoo! were $660 million last year. Add in the operational savings from combining the businesses, and online operations could make $1 billion a year in profits. Since the announcement of the offer, skeptics have begun selling Microsoft, and have wiped $3 billion off the value of the proposed deal. Buying Stock in Microsoft At Bargain Prices This gives value-minded investors an excellent entry point into buying stock in Microsoft at a bargain. As a contrarian, I like Microsoft because you are able to buy a growth company at a value investor earnings multiple. My screen produced several other value stocks that I believe merit further research. These firms that should get a closer look include: Holly Corporation, a petroleum refiner with no debt; American Eagle Outfitters, a growing retailer with no debt; and Forest Labs, a pharmaceutical company without any debt. All these firms trade at low P/E ratios. At the very least, put your favorite stock screener to work and find yourself a handful of cash-rich companies. Their powerful balance sheets should reward you over the long haul. Good investing, Floyd Today's Investment U Crib Sheet - More "Cash Rich" Ideas… - Below you'll find 10 more "cash rich" companies. All are debt-free, have market caps greater than $1 billion, and, to narrow the search even more, have projected earnings-per-share growth of 15% or more this year:
Company: Adobe Systems (Nasdaq: ADBE)
Industry: Software & Programming
Company: Blue Coat Sys. (Nasdaq: BCSI)
Industry: Computer Networks
Company: T.Rowe Price (Nasdaq: TROW)
Industry: Investment Services
Company: Forest Labs (NYSE: FRX)
Industry: Biotech & Drugs
Company: Intuitive Surgical (Nasdaq: ISRG)
Industry: Medical Equipment
Company: KBR, Inc. (NYSE: KBR)
Industry: Construction Services
Company: Infinera Corp. (Nasdaq: INFN)
Industry: Communication Services
Company: Copart (Nasdaq: CPRT)
Industry: Retail (Specialty)
Company: DeVry, Inc. (NYSE: DV)
Industry: Education
Company: Discovery Hldg. (Nasdaq: DISCA)
Industry: Broadcasting & Cable TV
- Floyd Brown, a regular contributor to Investment U and The Oxford Club, began his highly successful investing career while still in high school… and made his first million before turning 30. To see more of the companies he's watching, take a look at Investment U Issue #760 - Warren Buffett: Three Stocks on Berkshire's Buy List.
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