AboutDr. Joseph de Beauchamp Expertise As an MBA professor, I publish on over 2000 public companies. I engage in conversations with them daily. I love to help people find good advice in this complex market.
Expert: Dr. Joseph de Beauchamp Date: 4/24/2004 Subject: Please explain MSFT's 4/23 earnings report.
Question I am a 30 y/o amature investor. I have had a position in MSFT for about 6 months. Could you please explain why Microsoft's earnings report on friday was so positively received by the market. I read the report and understand that quarterly profit fell after legal charges, but revenue rose. From some books I've been reading I was under the impression that there is no greater indicator of a stock's stregth than a cosistant increase in current quarterly profits. Why did the market ignore the bad 1st quarter profit; was the increase in revenue important enough to overshadow the large drop in quarterly profits? The reason I'm asking is because if I had predicted this reaction I would like to have increased my position. Thank you for your insights and opinions.
Answer Dividends from a stock show distributions in profit. Without holding in the profits to boost shareholder wealth, shares normally drift lower or flatten out. Long term research shows when dividends start to flow, stock prices mature into patterns that show less growth. Profit expectations show as actual reasons for the stock going up. If Microsoft agreed to distribute this profit and pay high dividend, the stock would have gone nowhere.
Shares in Microsoft Corp. shot 6 percent higher on Friday, posting their biggest single-day gain in 18 months as investors reacted to the company's potential to both beat earnings forecasts. Value investors, who have been waiting for signs that Microsoft was ready to part with some of its $56 billion in cash, bid its shares up to $27.54 on the Nasdaq on Friday after the world's largest software maker promised it would detail plans for its cash hoard before a July analysts meeting. The rally in Microsoft shares, which helped lead the technology-laden Nasdaq index higher on Friday, came after the world's largest software maker reported fiscal third-quarter earnings that beat Wall Street estimates and raised its forecast for the remainder of the year.
Redmond, Washington-based Microsoft, which settled a lawsuit with bitter rival Sun Microsystems Inc. (SUNW) in the past quarter, is putting its biggest legal challenges over its business practices behind. Chief Financial Officer John Connors promised that Microsoft would provide clearer direction on what it will do with its cash by the company's annual analysts meeting in July. To put Microsoft's cash position in perspective, $56 billion is enough to give every man, woman and child in the United States $100, buy all 30 Major League Baseball teams and still fund the government of Thailand for a year.
Microsoft, which has an annual research and development budget of nearly $7 billion, also outlined some steps it is taking to control costs, by holding online meetings instead of traveling and exercising more control over marketing. Analysts noted the change in Microsoft's approach to costs, which began last year when Connors assigned a CFO to each of Microsoft's seven business divisions.
Microsoft -- typically conservative in its financial outlooks -- raised its revenue estimate for the year ending June 30 to $36.4 billion to $36.5 billion, up more than 13 percent from the previous year and above the average estimate of $35.9 billion, according to analysts' forecasts compiled by Reuters Research, a unit of Reuters Group Plc.
Although Microsoft recorded a $1.89 billion charge related to a settlement with Sun and a fine imposed by the European Commission, it still posted a profit excluding those charges and equity compensation of 34 cents, compared to the 29-cent profit that Wall Street had been expecting.
In short, the stock underperformed for many years, reacted to the news of better times. This short-term jump may fall apart if management decides to distribute the money in the form of dividends.
