Daily Archives: December 9, 2006

Analyzing Microsoft (MSFT)

By Yaser Anwar, CSC of Equity Investment Ideas

  • On November 30th MSFT released Windows Vista operating system after tons of delays and glitches- so what does this mean for shareholders? After all the delays and glitches in Vista and the new product cycle, The Street is expecting it to be a compelling 1.
  • In my view the new versions of Vista and Office 07 software, scheduled to be introduced in 07, will contribute to more notable growth in the 2nd half. For 07, MSFT sees 8% to 10% growth in worldwide PC unit shipments, and a 10% to 12% increase in servers. The Street’s current assumptions for Vista’s uptake and pricing already put 08 EPS consensus estimates of above $0.04 above consensus expectation.
  • Before I go on further let’s take a look at tech spending- Investors should look for 07 IT spending growth to be similar to 06, in the range of 6%-7%. Technology spending is now so entiwned with the overall macro picture (i.e. slowing economy & co.) that it makes it difficult to imagine IT spending accelerating in the face of anticipated deceleration in consumer expenditures and business spending.
  • According to IDC, global spending on packaged software totaled $211+ bn in 05, with MSFT’s share totaling $35 bn, 17% of the total market. IDC expects the system infrastructure market, which comprises roughly half of MSFT’s software revenues, to grow at a compound annual growth rate CAGR of 9.1% from 05 through 2010. The applications market, which counts for more than a 1/3rd of revenues, is expected to increase 7.0%, and the application development and deployment market, more than 10% of revenues, is expected to expand 7%
  • Let’s take a look MSFT’s consumer business divisions- MSFT management expects the consumer business division to turn profitable for the year in 08, requiring a $1+ billion improvement in the P&L. MSFT expects the Xbox business to turn profitable, then will focus on Zune (not so sure about Zune succeeding given the lackluster "buzz", if I may say, around it), while the Mobile & Embedded and Consumer Products businesses are profitable.
  • One question I always find asking myself is why are the making all these Xboxs and other consumer products when they loose money hand over fist? After digging deeper I’ve found that these businesses are strategic, in that they may provide a connective entertainment platform for the consumer [read: Xbox Live & Boston Consulting Group's growth share matrix].
  • Diversification is another reason. MSF can leverage the digital technology as it continues to evolve in the consumer segment. They can provide incremental earnings, so profitability is a goal (Profitability is a goal? really? the way they were bleeding $$$ I kind of thought they did it for free! just kidding). On a more serious note these businesses also act as competitive tools to offset or check major rivals in businesses that can accommodate more than just one major vender.
  • Coming back to Vista- There was so much buzz about Vista but now that its released does it still exist? I think its died down a bit but then again I don’t really have a technology network of connections to give me the proper view. So what to do? Be skeptical until proven otherwise. Investors should do not expect the uptake of the operating system to be as rapid as that of the "revolutionary" Windows 95, but it should be faster than that of subsequent, more incremental operating systems such as Windows XP.
  • The Street assumes that 29-35% of the PC installed base will be running Vista by the end of 08 and that 51% will be running Vista by the end of 09. Higher adoption rates (35% in 08 and 56% in 09) would add significantly to EPS- $0.04 in 08 and $0.06 in 09.
  • The penetration rates may seem a little high but historically these rates are achievable. I’m expecting Vista’s adoption rate to be somewhat similar to XP’s, where the earliest stages of the cycle are driven by consumers and with a longer, more sustainable corporate cycle kicking in upon the release of service packs.
  • Given the 23% rise since July in MSFT, I’m concerned that the Vista cycle is fully reflected in the company’s share price. To the contrary The Street believes that the potential for Vista-driven revenue upside still exists.

    • http://www.equityinvestmentideas.blogspot.com/

    Posted on: December 9, 2006 – 10:43 am in Software

    Comcast’s Plan To Eviscerate The Phone Company (T)(VZ)(CMCSA)

    Comcast has grown tired of the talk about Verizon and AT&T’s plans to use their new fiber-to-the-home infrastuctures to steal the cable company’s customer.

    Their reasoning may be sound. Comcast moved into the VoIP business, which is aimed that the telephone companies’ core busines, several years ago. Telephone firm are only new entering the consumer TV market.

    Only 24% of the homes that Comcast’s cable passes take its broadband service. Four percent of this base take phone service from the company. By 2010, Comcast thinks it can add another 10 million phone customers. By the end of this year, Verizon is only projecting that it will have 175,000 TV customers.

    Verizon as ambitious projections for its TV service, but, like all projections about a new business, they are subject to customer reaction to a product they have not used.

    Verizon is spending $18 billion to build out its fiber network.Some industry experts say that this cost represents nearly $10,000 to connect earch home to the new network.

    Comcast is sitting with a big moat around it  And, $18 billion is a lot of money to get back one home at a time.

    Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about

    Posted on: December 9, 2006 – 7:42 am in Telecom

    Toyota Quickens It Pace (TM)(GM)

    Like a champion marathon runner trying to put more distance between himself and his pursuers, Toyota is planning to streamline the way it makes cars and builds factories.

    Woe to the competition. Toyota wants to cut $1,000 from the cost of each vehicle its produces, a figure not different from the goal Chrysler has set for itself in the US. But, the US automaker’s base cost is much higher.

    The Japanese car maker’s paranoia iis well-founded. It lead in production efficiency to build a car, at 21.3 hours per vehicle, is not much greater than GM’s.

    Toyota has had quality problems unlike any in year’s past. It recalled 2.38 million vehicles in 2005. The company is not used to that kind of defect problem.

    While Toyota builds more efficient plants, plant that can build multiple brands off the same assembly line in record time, it can’t take its eye off of the quality ball.

    Productivity will not matter if its global sales operations are marketing cars that are viewed as having the kinds of flaws that used to be found primarily in vehicles produced by Detroit.

    Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

    Posted on: December 9, 2006 – 7:23 am in Autos