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

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

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!