Goldman Sachs analyst Sarah Friar this morning cut her rating on Microsoft (MSFT) to Neutral from Buy, trimming her target on the stock to $28, from $32, and reducing her EPS estimates for the company.
For the June 2011 fiscal year, she goes to $2.30, from $2.39; for FY 2012, she now sees $2.65, down from $2.73; for FY 2013, her new estimate is $2.90, down from $3.02.
“We believe the intrinsic value of shares cannot be unlocked if the status quo remains, and we have increased caution near-term on a more elongated PC refresh cycle, combined with the newer threat of notebook cannibalization from tablets, where Windows does not yet have a presence,” she writes in a research note. Friar notes that since she added the stock to the firm’s Buy list on August 12, 2008, the stock is down 13%, while the S&P 500 is down 11%. (Not the best call, obviously.)
She notes that MSFT has suffered significant multiple compression this year despite an 11% rise in consensus calendar 2011 EPS estimates. “Concerns over the longer-term sustainability of the� Windows/Office franchise have clearly weighed on the stock,” she writes. “However, this is not just a 2010 phenomenon: since 2002 Microsoft has had a -8% return on a dividends-reinvested basis, the second-worst of the largest dividend paying tech stocks. For the shares to unlock value, we believe a call to action is in order.”
Friar’s suggestions:
- A material boost to the dividend beyond the recent 23% rise – enough to put Microsoft among the top 20 dividend paying companies in the S&P 500 in terms of yield.
- A “coherent consumer strategy” that could involve paring back investments or divesting more peripheral assets like gaming.
- Market leadership in cloud computing.
MSFT this morning is down 41 cents, or 1.7%, to $23.97.
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