Shares of Microsoft (MSFT) are up 15 cents, or half a percent, at $27.19 after the company last night beatanalysts’ revenue estimates in its fiscal Q1 report and reported EPS in line with consensus.
The quarter was marked by stronger-than-expected performance from the “Business Division,” which includes Microsoft’s “Office”�program, but also collaborative work tools such as “Lync” and “SharePoint.”
Having come through a rough PC market in Q3 in rather healthy fashion, Microsoft now seems to be a company awaiting a catalyst, with both bull and bear presuming that is the arrival of Windows 8 sometime next year.
Rick Sherlund, Nomura Equity Research: Reiterates a Buy rating and a $32 price target. This fiscal year will “not be an upgrade year,” as he’s expecting Windows 8 sometime around next October or so, and the only catalysts are “likely to be the release to beta of Windows 8, probably by January.” Overall, the quarter showed “good results on low expectations,” Sherlund writes. The stock, at 9.4 times his 2012 calendar EPS estimate of $2.88, or 7.4 excluding cash, offers “some incentive to put toes back in the water.”
Mark Moerdler, Sanford Bernstein: Reiterates an Outperform rating and a $34 price target. The Windows division revenue of $4.87 billion was below his own $4.93 billion estimate, and Server & Tools was also light, by his reckoning. But the Business Division‘s $5.62 billion was ahead of his $5.55 billion estimate, and the Entertainment & Devices division’s $1.96 billion was ahead of his $1.62 billion estimate. Enterprise demand, according to the company, was “strong,” he notes. Moerdler is inclined to take Microsoft at their word that most of the weakness in the PC market is from a 50% drop in shipments of “netbooks.” And that bodes well for Microsoft, he thinks: “Strong PC growth ex-netbook is a positive for Microsoft going forward since their Windows revenue on PCs (including ultrabooks) is higher than netbooks.” Otherwise, the forecast Microsoft offered on its conference call, by segment of the business, largely seems to match his and consensus estimates, he writes.
David Hilal, FBR Capital: Reiterates a Market Perform rating and a $28 price target. It was an “uneventful” quarter, he writes, with most everything pretty much in line. He notes “healthy” demand for Office, SharePoint, Lync. “We remain concerned about PC growth going forward. While Windows 8 looks promising, we are taking a wait-and-see stance on its prospects for success. With regards to tablets, we think Windows 8 will face an uphill battle in the consumer market against the iPad but think it has a chance of penetrating the enterprise market.”
Heather Bellini, Goldman Sachs: Reiterates a Neutral rating on the shares and a $27 price target. She notes that the quarter’s upside was from the Business Division, “which has now posted upside to consensus for five of the past five quarters.” However, the success of some of those products, such as “Windows 365” and “Dynamics Online,” both actually services, not packaged software, brings down overall profitability because those programs have a lower profit margin than things such as Windows. Hence, Bellini cut her gross profit margin estimate for this fiscal year to 76% from 77.9% previously. Perhaps more important for the moment, so is the crisis at Western Digital (WDC), whose disk drive operations in Thailand have been shut down temporarily by flooding. “The real wild card to Microsoft�s FY12 forecast stems from the company�s Windows segment and the potential negative impact related to the flooding in Thailand which is impacting hard disk drive capacity (we estimate that 40% of the global capacity for HDD is located in Thailand).”
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