Microsoft Corp. (NASDAQ: MSFT) is said to be narrowing down its list of candidates to replace Steve Ballmer as chief executive officer. While equity investors may be glad to see Ballmer hit the door, there are some serious debates over who should lead Microsoft going forward and why. The transition risks even brought the research team of Bank of America Merrill Lynch to downgrade Microsoft’s stock to an Underperform rating from an already cautious Neutral rating.
When an analyst says “underperform,” this is effectively the same as a Sell rating. Merrill Lynch simply does not have a formal Sell in its research universe. Where the call gets interesting is that the firm maintained its $36.00 price target, and this target is slightly above the consensus price target from analysts.
In an effort to show fairness, we also direct investors to look over to a recent report from Rick Sherlund of Nomura Securities. He outlined how Microsoft could get to $45 or perhaps even $50 if the company follows his outline.
The Merrill Lynch downgrade shows that if Ford’s CEO Alan Mulally is selected, the firm thinks that he could drive Microsoft shares higher by 10% as a full $1.00 in earnings per share synergies are discounted. Then there is the risk of an internal CEO replacement. The Merrill Lynch team believes that internal candidates such as Kevin Turner, Stephen Elop, Satya Nadella or Tony Bates could drive shares down 10%. This would be from obvious divestitures and major cuts to operating expenses.
A quote that stood out shows more risk than reward. It said:
We believe that 80% probability of an internal candidate (across 4 candidates) and 20% probability of Mr. Mulally coincidentally support our unchanged $36 price objective — more downside versus upside. We would reconsider if low-margin businesses reach scale and drive leverage.
Microsoft shares were down 1.3% at $37.34 in late-morning trading on Monday. The stock has traded in a 52-week range of $26.26 to $38.22, and the Thomson Reuters consensus analyst price target is $35.77.