Q1 Preview: Microsoft (MSFT) Softening PC Demand, Rebounding IT Budgets Top Investor Concerns


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Microsoft Corp. (Nasdaq: MSFT) is trading higher ahead of the company's first quarter earnings report, expected out after the market closes today. Shares are up0.2% in afternoon trading.

The tech giant is expected to report an EPS of $0.55 on revs of $15.81 billion. In the fourth quarter, 2010, the Redmond, WA-based company reported an EPS of $0.51 on revs of $16.04 billion. Last year, in Q110, the company posted an EPS of $0.48 on revs of $15.06, edging out the consensus EPS of $0.47 on revs of $14.78 billion.

Shares of the company gained a little through the quarter, ending it 6.3% higher to $24.49. The stock is trading 6.7% up since the end of the quarter, but is 14% down from the $30.50 that it started at for 2010.

A simple valuation pegs Microsoft trading at 10x next year's EPS estimates, a little cheaper than the 13.8x for Apple (Nasdaq: AAPL), 13.2x for Oracle (Nasdaq: ORCL), and 18.6x at Google (Nasdaq: GOOG).

Data from Bloomberg has 30 analysts with a Buy rating on MSFT, 12 with a Hold, and none suggesting to Sell. The analyst price target average is $32, with a high of $40 and a low of $27.

Analyst Ratings Through the Quarter
In August, Global Equities downgraded the shares from Overweight to Equalweight, with a price target of $25.

Also in August, S&P Equity downgraded from Buy to Hold, cutting their price target from $35 to $31.

Wells Fargo started coverage on Microsoft with a Market Perform and valuation range of $27 - $29.

Hapoalim Securities started with a Buy rating and $30 price target.

In September, Standpoint Research initiated coverage with a Buy rating and $29 price target.

Deutsche Bank thinks Microsoft will report an EPS of $0.52 on revs of $15.9 billion, mixed to the Street consensus. The quarter should be driven by enterprise adoption of Windows 7 and the non-enterprise adoption of Halo: Reach. Sale of Halo reached $200 million on its first day. DB thinks the most important metric going into the earnings release will be their unearned revenue, which DB has pegged at $13.3 billion. Key issues on the call will be the Yahoo! (Nasdaq: YHOO) partnership, cash usage, mobile strategy for the upcoming release of the Windows Phone 7, and what they're going to do with all that cash. They have a Buy rating and $35 price target on the shares.

Janney notes that Yahoo! reported a ho-hum quarter, but said that when they spoke of their partnership with Microsoft, all deadlines were being met and organic search results have improved markedly/ Janney sees an EPS of $0.56 on revs of $16.2 billion. Janney also has a Neutral rating on the shares, with a fair value of $28.

Notably in the quarter, Microsoft increase their quarterly dividend 23% to $0.16 per share. The new yield of about 2.5% might have drawn some investors back into the stock, which has been hovering in the range of $21 to $30 for about 18-months.

The company also introduced their new Windows Phone 7, which looks solid (more solid when compared to the failed KIN device), but with Apple also introducing a revamped iPhone in their quarter, and Motorola ( MOT ) making strides with their smart phone offerings, some are pegging the move as too little too late.

Another area of risk is the tablet market, which is causing a consumer shift from PCs and netbooks. Though mass transition will take a while, the sheer excitement and volumes that Apple's iPad has seen has driven multiple developers and manufactures to step-it-up and get their own device on the market ahead of the holidays. Microsoft may also enter the market, but their high exposure to the PC market may have cost some sales and software upgrades through the quarter. Barclays lowered their estimates in September, noting that Microsoft is most exposed to slowing PC demand. They lowered their FY11 outlook from $70.2 billion in revs and an EPS of $2.44 to $68.9 billion in revs and an EPS of $2.39.

Investors may also be curious about their Office 2010, which come out during the quarter, and any comments about recent key executive departures.

Microsoft Corp. is expected to release their Q111 earnings on Thursday, October 28, 2010, at approximately 4:00pm EDT. Stay tuned to StreetInsider.com's EPS Central section to see our analysis of the highly-anticipated quarterly results within seconds of their release.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks
More Headlines for: AAPL , GOOG , MOT , MSFT , ORCL , YHOO

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