Focus on Microsoft
Interview: Noble Financial Group---Morgan, Daniel---Fund Manager
>> as we’ve been reporting, microsoft is out with their fiscal fourth quarter earnings. it reported it earned 23 cents a share, missing estimates of analysts polled by thompson financial. the company raised its full year forecast to $34.9 billion, that up from $33.1 to $33.8 billion. for a closer look at what’s ahead for microsoft and what he sees for the technology industry overall, dan morgan joins us. he’s an analyst and fund manager at noble financial, joining us from boynton beach, florida. good to speak to you once again. what do you make of microsoft’s earnings here? kind of a complicated result because of so many charges. give us a sense of what you get out of this.
>> yeah, it is kind of complicated, a lot of different issues. but when you work the numbers down you came in with the 23 cents, that is correct on the bottom line for the fourth quarter. i think the good thing you could gather from it initially looking at the numbers, is like you said going into fiscal year 2004. they are finalizing their year in june. looks like the guidance is little better than what everyone was originally anticipating on the revenue side. also on the bottom line earnings side. there is also―looks like there is going to be some sort of compensation expense that they are going to be factoring in. looks like fiscal year 2004. when you get through those numbers better, i believe in the $1.06 consensus. even though they are initially shy a penny in the fourth quarter, looks like the guidance was better in revs and earnings for next year than originally anticipated.
>> c.f.o. john connors was talking about fourth quarter sales, indicating that they topped forecasts and reflected solid corporate and consumer demand for microsoft products, though again, that was a penny shy of the estimate. going forward, are you getting kind of a clear idea of what they are trying to say about the future here? what do you expecting?
>> well, microsoft, as we know, is always very conservative as far as their guidance. they traditionally willow ball the numbers to hopefully exceed them down the road. the key, i think going forward, are a couple things.if we look at what happened earlier in the week with intel, with the expansion that we saw in gross margin and the fact that we saw things hopefully beginning to improve in the p.c. environment, we saw second quarter numbers and p.c. unit volume was up about 10% which is the first time in about four years that we’ve had double digit growth. so i think that things may be beginning to improve in the p.c. area. i think this obviously bodes well for both intel and microsoft. overall i think we’ll see things start to get better as we go into next year.
>> when you look at the nasdaq and the double digit gain it’s seen since the beginning of the year and microsoft barely moving what does that mean with a big gain of the nasdaq and microsoft standing still?
>> i think you got a couple factors. microsoft’s stock did not get hurt as much as some other names in the technology sector. you look at sun microsystems or some of these other names that got hurt that have then since bounced back, microsoft took most of its depreciation with regards to the legal issues that it had, even before the nasdaq got hit so hard. so it really kind of stayed flat. it didn’t go down as much and didn’t bounce back as much from a price performance perspective. other issues you have to focus on with microsoft is there has been a slight reduction in their margins. if you look at comparable to the peak levels of 2000 where they finalized out more recently. you have seen some compression from that perspective. i’m sure that has also hurt their ability to generate the same profits we’ve seen in the past. the growth rates now are probably 13% compared to what we were seeing in the late 90’s, you know, 25, 30%. so i think because of that, that’s why the stock has just kind of stayed there stagnant and hasn’t had the big rebound that other tech names have.
>> do you expect the rebound to come?
>> i think microsoft is really contained by the current multiple. it’s trading at 25 times earnings and you are growing at 13, 14%. i mean you can’t really say this stock should trade at 35 times earnings. i think it’s going to stay pretty much in line with the current valuations.
>> is it stilg a growth company here? we are seeing mofts doing dividend increase, switching out of options, other matters that are making themselves look pretty darn nongrowth-like.
>> right. pay dividend, they have what, excess almost $45 billion in cash that they can disburse out if they want to. they are still a growth company. revenue has increased for the year. earnings increased for the year. they are expected to increase next year. they are not growing at the pace that everyone is accustomed to. i think wall street is having trouble kind of digesting these new valuations and growth rates. that’s the reason why the stock sits there.
>> i want to ask you about i.b.m.. it was down about 4% today. yet you say their earnings weren’t so bad. why the discord with big blue?
>> i mean i think the big thing wasn’t the fact that these earnings were a problem. i think it’s what they didn’t say. that is they didn’t give a lot of credibility behind a major turn around in the second half of this year. everybody looks to i.b.m. as the bellwether company in technology. you talked earlier about some of the issues with their software comparisons weren’t up to snuff and so forth. the big thing is everybody was hoping they’d come out and say i think things are turning around. second half will be better than the first half. i think everybody was hoping that after what we saw with intel, we would see this momentous move. they got sour on it. they sold off, even though they were better on revenues than expected.
>> dan, thank you very much. dan morgan, analyst and fund manager at noble financial. coming up next, the latest headlines on citigroup.
