Microsoft
Interview: The Kelmoore Funds---Kelmon, Matt---Fund Manager
>> shaoeurs of microsoft up as much as 1.3% after european union regulators ruled microsoft illegally used windows operating system to hold down competition from rivals. they have lost 10% this year partly on competition that linux will hurt sales of windows. our next guest owns shares of microsoft in its fund and just recentlyed a to his shares. welcome, matt. we saw microsoft soft shares up today. you haved a to your holdings. that suggests you don’t see a danger to the company from the european union.
>> not at all.i have been adding on weakness and we’re seeing valuations on the stock that you pretty much have never seen, about 20 times next year’s earnings. trading a discount to its peers. i think it’s a great time to add to the stock.
>> this fine is a record for the european union. most analysts say it isn’t going to have an impact on earnings?
>> i think there will be no impact on earnings. as a percentage of their cash balance, it’s very, very small. the remedy may be a bigger deal. i think microsoft will work through this and be able to put their $50 billion to work in other areas and maybe in a form of a dividend rumored last summer.
>> let’s take apart the other parts of the ruling. the company has to separate its windows media player from the operating system according to the e.u. does that hurt microsoft? does that benefit competitors like real networks?
>> of course it will not help them. the media player is a small percentage of potential revenue and current revenue so really i think in hindsight a couple of years from now we’ll forget about this an the stock will be a lot higher.
>> how about for real networks?
>> it’s good for real networks. it’s a positive. it’s pretty much their only product so it’s a much bigger decision for real networks than it is a negative for microsoft.
>> the other issue for microsoft is linux. it continues to gain ground. red hat did well in the most recent quarter. how much of a threat do you see there?
>> competition is good. one reason they got into this whole scenario in the first place is there wasn’t much competition. i guess you remember back in the mid 1990’s when they took an investment in apple computer so they would have some competition. it’s healthy for the market . linux will do very well but i think microsoft is the dominant player and the one you want to own.
>> at this point you are telling me we’re not seeing a lot of down side for the company. what’s the upside? there’s no killer ap in the works, is there?
>> it’s traded sideways for the last couple of years. there’s no killer aps. they have been diversifying their portfolio. they will continue to do that.$50 billion in cash can buy you a lot of r&d. although it performed pretty well in the bear market , i think it’s going to outperform the market over the next 12 months.
>> let’s talk about the market itself. we have seen a lot of sideways trading. the nasdaq finished up a little bit today but it’s down over 4% for the year. where do you see things going from here?
>> well, it’s starting to get a little negative out there which is a positive for the market . volatility has picked up. i don’t know if we have had the absolute capitulation bottom but i think we’re close. it’s a good time to start getting back in to the market . earnings reports are going to come out in april. i think you will see momentum on earnings, visibility back to where we were last quarter. i think that will be a reason and catalyst to phoft market higher and especially the nasdaq in the near run.
>> people were talking in the first quarter when earnings came out that that would be the best quarter because comparisons to the previous year’s quarter started to get harder and that also we’d start to see margins narrow a little bit. do you see that happening or are people still bullish about earnings?
>> yeah, you may have just seen the best earnings last quarter. but i think you’ll be more discerning on particular companies and high quality earnings will be important going forward. the j.d.s. uniphase, although they’re gaining market share, i think people will focus on cash flow and potential to pay dividends. if you look over history of the s&p 500, a good portion of the return over time has been made up from dividends. we got away from that in the last 1990’s. everyone is focused on growth. as they become more and more envogue and the 15% tax rate on corporate dividends holds in there, i think it will be a bigger part of total return in the future and i think you’ll see companies, microsoft, cisco% -pand some of them mature -- mature technology companies, increase their dividends.
>> what’s the catalyst for a market turn around?
>> a lot of it is the negativity we’re talking about. people don’t think there will be good earnings reports coming out. people think we just saw a bath. there is money on the sidelines. there is still money coming into equity mutual funds. april we’ll see tax refunds and money going back to work and funding of retirement accounts that. will be enough to move the market forward in the near term.
>> thank you very much. our thanks to matt kelmon of the kelmoore fund. increasing competition from the small airline carriers. now the airlines are fighting back. details, next.
