Microsoft Corporation (MSFT) Too Unloved, Airlines Too Loved

Page 1 of 2

Microsoft Corporation (NASDAQ:MSFT)On Friday, Mr. Market was down on the world’s largest software company, Microsoft Corporation (NASDAQ:MSFT).

Shares of “Mr. Softy” fell nearly 12% after it reported its fourth-quarter earnings. The company missed analysts’ expectations on both earnings and revenue. Sales of its Windows software disappointed. And Microsoft Corporation (NASDAQ:MSFT) took a $900 million accounting charge related to its Surface tablet.

In contrast to Microsoft Corporation (NASDAQ:MSFT), airline companies are flying high. Shares of companies like Southwest Airlines Co. (NYSE:LUV) and United Continental Holdings Inc (NYSE:UAL) have basically doubled in price over this past year.

Mr. Market and Mr. Softy

Mr. Market is the manic-depressive business partner that legendary value investor Ben Graham created in his book The Intelligent Investor. Graham said investors should think of the market like an erratic business partner who every day offers to either buy your stake in the business or sell you his share.

When Mr. Market is happy, he’s willing to overpay for your shares. But when he’s sad, he’ll sell at almost any price. It’s a simple way to remember that markets aren’t rational, they’re driven by emotion. And you can profit by taking advantage of the extreme optimism and pessimism. Right now, the market is extremely pessimistic on software and Microsoft Corporation (NASDAQ:MSFT), and extremely optimistic on shares of airline companies. We can take advantage of both situations.

A case of extreme pessimism

Mr. Softy is virtually a monopoly in the operating systems market. It holds roughly 92% of the operating system market. Most people believe Microsoft is all about Windows. But Windows hasn’t been the No. 1 source of sales or profits for three years. If you took Windows away from Microsoft, the stock would still be a bargain today. It would still generate more than $20 billion in operating income.

I’ll go even further. If you took away everything but the two biggest parts of the business (by revenue), Microsoft Corporation (NASDAQ:MSFT) Business Division and Server & Tools, you’d have a stock trading at an enterprise value of less than 8.5 times operating income. Those two divisions now make up nearly 60% of sales and 70% of operating income.

The beauty of this lies in the simplicity. Software is a high profit margin business. Less need for capital expenditures means more profit in the pockets of shareholders. Microsoft’s operating margin and profit margin are 35% and 28%, respectively.

In 2003, investors were willing to pay $26 in share price for every dollar of profit that Microsoft generated. The terms of investing in Microsoft are much different today. As of Monday’s close, Microsoft Corporation (NASDAQ:MSFT) traded at $32 per share while generating $2.60 in annual profits, $0.92 of which get returned to the owner each year for every share you hold. That’s only 12x earnings and 10.5x next year’s earnings.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Top Reasons For Getting Fired

The 3 Best States to Start an LLC

10 Jobs That Allow You to Travel

7 High-Paying Jobs You Can Do From Home

12 Best Cities to Shop in USA

10 Best States To Practice Medicine

The 10 Best States to Have a Business

The 12 Most Expensive Apple (AAPL) Apps in the Market

The 10 Richest Billionaires in the World

10 Biggest Kickstarter Failures

The 10 Best Places to Work At

The Top 10 of Google Inc (GOOGL)’s Most Expensive Acquisitions

13 Best Cities to Visit in South America

10 Most Expensive Works of Art of All Time

The 10 Richest Banks in the World

The 10 Best-Paying Jobs in America (2014)

7 Most Expensive Foods in the World

The World’s Top 10 Earning Authors

Five Wicked and Very Expensive Items (and Other “Stuff”) Sold on eBay

10 Biggest Celebrity Bankruptcies

The Top 10 Highest Paid CEOs in 2014

The 10 Most Expensive Real Estate Cities in America

10 Most Expensive States To Live In America

The 10 Best Airlines in the World

The 10 Best-Selling Cars in 2014

The 10 Best Industries to Invest In

The 10 Most Expensive States to Own a Car In

Top 10 Business Schools in US: 2014 Rankings

Top 20 Female Billionaires in 2014

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!