The Tycoon Report

A Sleeping Giant for Your Portfolio

Monday, November 12, 2007 | Wayne Mulligan

I can’t tell you how many times I’ve brought up this tech stock over the last 12 months, and have literally been laughed at.  And for the life of me, I can’t figure out why.

Here’s a company that:

• Holds the top spot in almost every single market it plays in.
• Has had a track record going back over two decades for stellar business and financial performance.
• Yet its stock has languished for the last five years.

Can you guess the company I’m talking about?

That’s right – I’m talking about none other than Microsoft (Nasdaq: MSFT)!

Don’t roll your eyes so quickly!  Let me give you the facts first, and then we’ll see how skeptical you are.

1. Microsoft Windows and Office have a 90% market share in their respective markets.
2. The company is on track to do over $50 billion in sales this year.
3. MSFT maintains a 30% profit margin (approximately) ...
   
4. And a 40% return on equity.
   

Let me tell you why these are important facts to remember.

With a 90% market share, Microsoft has what nobody else has – enormous distribution.  Just like Rockefeller before him, Bill Gates understood the importance of distribution.  You could have the greatest software in the world, but if you couldn’t cheaply and effectively get it out to the public, then you’d be stuck.

With Windows on 90% of the world’s computers, it’s fairly easy for Microsoft to push new products out the door at very little cost ... that’s HUGE, and is what contributes to its healthy revenues and bottom lines.

The average American company earns roughly 15% profit margins – Microsoft maintains double that number.  For a company that size, that is definitely a HUGE achievement, and it’s certainly the type of company that I’d be looking to invest in.

And as for the Return on Equity – that means that even though Microsoft is losing a little bit of ground when it comes to its web strategy, it’s certainly making effective use of its capital.  A 40% ROE means that for every dollar Microsoft puts into its business, it’s able to pull $.40 cents out.  Again, the average American company is closer to 16%.

But these are just numbers, and as we all know, Microsoft may be a great company, but it still may not be a great time to buy the stock.

So to answer the final question, “Is Microsoft a buy NOW?” all I have to say is:

Heck, yeah!

Take a look at a long-term chart on Microsoft – you’ll see that it’s been trading in a tight range for over five years.  It’s just sat between $29 and $31 per share for as long as I can remember.

But with the release of its new operating system, Windows Vista, the company has finally broken out of that trading range and shot over $36 per share on HEAVY volume!

When you combine that with the company’s move into online advertising and recent acquisitions of companies like aQuantive, I think we’re in for a stellar year for Microsoft.

As one of my old clients used to say, “Wayne, I think we’re gonna need to back the truck up into this one."  And those are my sentiments exactly!

Microsoft will be a great long-term hold, and I think it’ll show us some fantastic short-term profits, as well.




Wayne Mulligan
Contributing Editor
The Tycoon Report



Tuesday, November 13

14:00 - Treasury Budget (for October): Consensus -$53.0B

Big Picture: Strong tax receipt growth continued to leave a path toward lower deficits given the economy, profits and income growth.  Spending was cut back to the slowest growth in ten years in FY07 despite the war spending.  The FY05 improvement sliced away a quarter of the record $413 bln FY04 deficit as FY06 sliced away another $71 bln and FY07 another $85 bln.  We're not optimistic that the deficit slimming will continue in to FY08.  The FY07 deficit of $163 bln amounted to just 1.2% of GDP.

Implications: The monthly Treasury budget data follow strong seasonal patterns which produce huge month-to-month fluctuations in the deficit.  These fluctuations tell us little about long term budget trends.  To the extent that the market analyzes the monthly Treasury data, the focus is on year/year changes in receipts and outlays, since the data are not seasonally adjusted.  Only in April, the most important month for tax inflows to the Treasury, does the market pay any attention to this report.  The data can be predicted with reasonable accuracy by using daily data in the Daily Treasury Statement.


Wednesday, November 14

8:30 - Retail Sales (for October): Consensus 0.2%, Retail Sales-ex. Auto (for October): Consensus 0.3%

Big Picture: Retail sales are slowing under the weight of high gas prices, falling home prices and restrictive Fed policy.  The housing recession drags consumer durable goods (e.g. furniture, building equipment, appliances) as auto sales have been weak.  Despite the low unemployment rate and strong income growth the Fed tightening and high energy prices have had a deflating effect on consumer spending and big ticket durable goods purchases particularly.  Strong income growth and the low unemployment provides support and is the best read on the future sales pace.

Implications: The retail sales report is a measure of the total receipts of retail stores.  The changes in retail sales are widely followed as the most timely indicator of broad consumer spending patterns.  Retail sales are often viewed ex-autos, as auto sales can move sharply from month-to-month.  It is also important to keep an eye on the gas and food components, where changes in sales are often a result of price changes rather than shifting consumer demand.  Retail sales can be quite volatile and the advance reports are subject to rather large revisions.  Retail sales do not include spending on services, which makes up over half of total consumption.  Total personal consumption is not available until the personal income and consumption reports are released, typically two weeks after retail sales.

8:30 - PPI (for October): Consensus 0.2%, Core PPI (for October): Consensus 0.2%

Big Picture: September 2005 PPI growth of 6.9% yoy stood at a 15-year high, and stands at a 4.4% yoy gain currently.  The core stands at 2.0% yoy from July 2005's decade high of 2.8%.  The producer pipeline pressures are not providing any lift to finished goods as energy prices provide the volatility.  The directional trends for commodity-based producer prices aren't providing any lift to core commodity prices in CPI which are lower than a year ago.

Implications: The Producer Price Index measures prices of goods at the wholesale level.  There are three broad subcategories within PPI: crude, intermediate, and finished.  The market tracks the finished goods index most closely, as it represents prices for goods that are ready for sale to the end user.  Goods prices at the crude and intermediate stages of production often provide an indication of coming (dis)inflationary pressures, but the closer you get to crude goods, the more that these prices track commodity prices which are already available in traded indexes such as the CRB (Commodity Research Bureau).  At all stages of production, the market places more emphasis on the index excluding food and energy, referred to as the core rate.  Food and energy prices tend to be quite volatile and obscure trends in the underlying inflation rate.  Though the market reaction is determined by the month/month changes, year/year changes are also noted by analysts.  The index is not revised on a monthly basis, but annual revisions to seasonal adjustment factors can produce small adjustments to past releases.

10:00 - Business Inventories (for September): Consensus 0.3%

Big Picture: The inventory to sales ratio stands at 1.27 months just above the record low 1.25 months in January 2006.  The inventory drawdown in late 2006 and early 2007 is now past.  The long trend toward smaller I/S ratios and the tighter range leaves less of a resulting effect on economic growth as the drawdowns or restocking takes place over a quarter or two.  The large inventory drag on GDP in Q4 and Q1 turned to gains in Q2 and Q3 2007.

Implications: The business inventories report includes sales and inventory statistics from all three stages of the manufacturing process (manufacturing, wholesale, and retail).  But by the time it is released, all three of its sales components and two of its inventory components have already been reported.  Because retail inventory is the only new piece of information it contains, the market usually ignores the business inventories report.  However, sometimes retail inventories swing enough to change the aggregate inventory profile.  This may affect the GDP outlook. When it does, the report can elicit a small market reaction.


Thursday, November 15

8:30 - CPI (for October): Consensus 0.3%, Core CPI (for October): Consensus 0.2%

Big Picture: The core rate of consumer inflation reached a decade high of 2.9% yoy in September 2006 and has eased off to 2.1% yoy.  The stickier prices for shelter and medical care and tuition will continue to hold firm as yoy core commodity prices have fallen from a year ago.  Energy prices provide the monthly swing.  In the big picture its aggregate demand which provides the price direction as sub-potential growth (below 3%) is easing the core inflation pressures over time.  The Fed more closely watches core PCE prices as an inflation guide which stands at 1.8% yoy -- in the Fed's 'comfort zone'.  Overall CPI reached a 14-year high of 4.7% yoy in Sept '05, given the push from energy prices and now stands at 2.8% yoy.

Implications: The Consumer Price Index is a measure of the price level of a fixed market basket of goods and services purchased by consumers.  CPI is the most widely cited inflation indicator, and it is used to calculate cost of living adjustments for government programs and is the basis of COLAs for many private labor agreements as well.  It has been criticized for overstating inflation, because it does not adjust for substitution effects and because the fixed basket does not reflect price changes in new technology goods which are often declining in price.  Despite these criticisms, it remains the benchmark inflation index.  CPI can be greatly influenced in any given month by a movement in volatile food and energy prices.  Therefore, it is important to look at CPI excluding food and energy, commonly called the "core rate" of inflation.  Within the core rate, some of the more volatile and closely watched components are apparel, tobacco, airfares, and new cars.  In addition to tracking the month/month changes in core CPI, the year/year change in core CPI is seen by most economists as the best measure of the underlying inflation rate.

8:30 - Initial Claims (for 11/10): Consensus NA

Big Picture: Weekly initial claims can be volatile, as the trends reflect some easing in the tight labor market.  Layoffs (seen in initial claims) remain subdued given the lean supply of available workers as hiring (seen in continued claims) has cooled as reflected in the 20-month high in the early September 4-week average and the slower growth in payrolls.  Claims provide a nearly real time read on layoffs and the labor market, as the low 4.7% unemployment reflects the broader combined read of layoffs and hiring.  A level above 350K for claims is worrisome as a 375K level would signal a potential recession.  We're nowhere near there.

Implications: Initial jobless claims measure the number of filings for state jobless benefits.  This report provides a timely, but often misleading, indicator of the direction of the economy, with increases (decreases) in claims potential signaling slowing (accelerating) job growth.  On a week-to-week basis, claims are quite volatile, and many analysts therefore track a four-week moving average to get a better sense of the underlying trend.  It typically takes a sustained move of at least 30K in claims to signal a meaningful change in job growth.

12:00 - Philadelphia Fed (for November): Consensus 6.0

Big Picture: The regional manufacturing index is volatile, but tracks the direction of national orders and production.  The gains in orders and shipments follow the late 2006 stall tied to autos, housing and business investment.  Late 2007 risk is tied to another potential stall in business investment, given economic growth concerns and financing rates.  The Philly index is independent of its components, so can provide a misleading read and is especially volatile given the small region covered (mid and east PA, southern NJ and Delaware).  The manufacturing sector moves in mini-cycles compared to the overall economy, and the regional measures move in even shorter cycles with far more month-to-month volatility.

Implications: There are many regional manufacturing surveys, and they tend to be ranked in order of timeliness and the importance of the region.  The Philadelphia Fed's survey is first each month, actually coming out during the third week of the month for which it is reporting.  Several smaller surveys are then released before the Chicago purchasing managers' report on the last day of each month.  A few, such as the Atlanta and Richmond Fed surveys, are released after the NAPM and are of little value.  The purchasing managers' reports are measured like the national NAPM - 50% marks the breakeven line between an expanding and contracting manufacturing sector.  For the Philadelphia and Atlanta Fed indexes, 0 is the breakeven mark.  These surveys can be of some help in forecasting the national NAPM - particularly the Philadelphia and Chicago surveys which are more closely watched due to their timeliness and the fact that these regions represent a reasonable cross section of national manufacturing activities.


Friday, November 16

9:15 - Industrial Production (for October): Consensus 0.1%, Capacity Utilization (for October): Consensus 82.1%

Big Picture: Industrial production has been showing a lift after the weakening in late 2006, but that lift is fading.  Factory orders are rising slowly as exports provide a welcome boost to production.  The stall from autos, construction and business investment is past, but risk is that it returns given the less glowing outlook for the economy.  Capacity use stands at 82.1% -- still below the level historically consistent with inflationary pressures -- as manufacturing reflects some excess capacity at 80.4%.

Implications: The index of Industrial Production is a fixed-weight measure of the physical output of the nation's factories, mines, and utilities.  Manufacturing production, the largest component of the total, can be accurately predicted using total manufacturing hours worked from the employment report.  One of the bigger wild cards in this report is utility production, which can be quite volatile due to swings in the weather.  Severe hot or cold spells can boost production as increased heating/cooling needs drive utility production up.  In addition to production, this monthly report also provides a measure of capacity utilization.  Though the rate of capacity utilization is seen as a critical gauge of the slack available in the economy, the market does not completely trust this measure.  Capacity is very difficult to measure, and the Fed essentially assumes that growth in capacity in any given year follows a straight line.  One can therefore predict the capacity utilization rate quite accurately based on the assumption for production growth.  The 85% mark is seen as a key barrier over which inflationary pressures are generated, but given revisions to these data and the difficulties with capacity measurement, the 85% mark should be viewed cautiously.  It would be appropriate to look for corroborating inflation indications from commodity prices and vendor deliveries.


Source:  www.Briefing.com