Even after a recent pop, this tech giant is cheaper than it seems…
Another company that saw one-time problems drag down earnings temporarily was Microsoft Corporation (NASDAQ:MSFT). A few quarters back, the company had to write-off a bad acquisition from previous years, which knocked off some of its more normalized annual earnings power. In its most recent quarter, however, with an increase of around 19% in EPS, the company is clearly back on track, and was rewarded by the market with some capital appreciation.
Microsoft Corporation (NASDAQ:MSFT) is currently priced at around 17 times trailing earnings, but looking at more normalized earnings going forward of an estimated $2.75– the company is priced at only a little under 11 times forward earnings.
The bottom line
Companies can have bad quarters or experience temporary problems (such as one-time items and other isolated incidents) that render their earnings weaker than normal. If these problems are simply “bumps in the road” and are not continual and are not characteristic of the company’s more normalized earnings power, they may provide an opportunity for an investor to accumulate shares of a wonderful company for cheaper than it looks.
If the company can manage to move right along and get back to generating its more normalized earnings going forward– meeting analyst expectations– then you can buy it now while everyone else is whining about overvaluation. And then, watch as the share price catches up further down the road, giving you some nice little gains after a few normal quarters.
Do keep in mind, however, that there is less of a margin of safety in these companies, and if one of the company’s earnings difficulties becomes a continuing problem, you will be the one left holding the overvaluation bag in the end.
The article 3 Blue Chips That May Be Cheaper Than They Seem originally appeared on Fool.com and is written by Joseph Harry.
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