Tuesday, May 12, 2009

Microsoft - VERY attractive funding.

MSFT - Microsoft Purchased 3/11/09 at 16.75, +18%

I purchased Microsoft mainly because it's FCF yield as a % of its net-of-cash Market Cap was approximately 11%, with a PE of less than 9 (trailing and forward). There are positive comments lately about Windows 7 - I do not share in any view that this will be an enormous catalyst for MSFT, or that the near-term environment is a positive one. But I felt that a sub-10 PE and a North-of-10% FCF yield are present a great value for the quality and consistency of Microsoft's earnings and cash flow stream.

As for Microsoft's "cost of capital," consider their recent debt offering -

$2 bln of 2.95% notes due June 1, 2014, $1 bln of 4.20% notes due June 1, 2019 and $750 mln of 5.20% notes due June 1, 2039.
As Jeffries put it, "The offering was completed with a very low spread above Treasuries, cheaper than comparable AAA-rated debt from Johnson & Johnson (JNJ) and 3M (MMM)."
This company's FCF should not equal 10% of the company's purchase price - the stock remains a bargain at these levels.

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