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 44 percentage points in 21 months Learn how!

Lists

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

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

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!