Unloved stocks in neglected sectors means potential bargains. One sector that seems to be losing steam is technology. A recent string of earnings reports in the tech sector has left these three companies looking attractively valued.
A disappointing quarter, plagued by a $900 million charge related to Surface RT tablet inventory, sent shares of Microsoft Corporation (NASDAQ:MSFT) down by more than 10%. The charge alone gave a $0.07 haircut to the company’s earnings. Overall earnings came in at $0.59 a share, as opposed to the $0.75-a-share estimate expected by analysts. That’s a huge miss.
Still, there is hope. Declining PC sales are troubling, but the company still managed to increase revenues by roughly 10%– especially where it matters most. Arguably the most important division of the company, the Microsoft Business Division (which includes Office sales), saw a 14% gain in revenues. Office is one of the company’s biggest money makers, and is now at a $1.5 billion annual revenue run rate, according to PC World.
Xbox Live, the gaming and digital media delivery service that charges users a fee to play multiplayer games online, also saw sales jump nearly 20%, which may carry over to the new Xbox One console scheduled to be released later this year.
Microsoft Corporation (NASDAQ:MSFT) is also incredibly strong financially and is one of only a few companies in the entire world with a AAA credit rating:
The company is also turning into a dividend growth gem, with a low payout ratio and plenty of free cash flow:
With a payout ratio around 34%, Microsoft Corporation (NASDAQ:MSFT) pays out a dividend yielding a tad under 3%, which can provide an investor with a relatively safe source of income. The income won’t cost you an arm and a leg either, with shares trading at a cheap 12 times earnings, and around 10.5 times forward earnings.
“Big Blue” in big trouble?
Another technology stock recently causing concern among many investors is International Business Machines Corp. (NYSE:IBM). Shares of IBM are also trading cheaply in relation to earnings, sporting a P/E ratio of about 14 and a forward P/E ratio of around 11. International Business Machines Corp. (NYSE:IBM), like Microsoft Corporation (NASDAQ:MSFT), also dropped over 10% because of missed earnings– two quarters ago.
International Business Machines Corp. (NYSE:IBM)’s most recent quarter, however, was different. The company beat on earnings, even though revenues came in light.
The balance sheet holds a lot of debt and the company is fairly leveraged:
The high debt-to-equity ratio, however, can also be attributed to International Business Machines Corp. (NYSE:IBM)’s extensive buyback program and global financing arm. The company still manages to generate massive amounts of free cash flow, which gives it more maneuvering room:
International Business Machines Corp. (NYSE:IBM) has paid out a dividend every year since 1916, and also has an impeccable record of raising its dividend every year. Shares currently yield only about 1.90%, but with an extremely low payout ratio of 25%, International Business Machines Corp. (NYSE:IBM)’s dividend is one of the safest on the market.