Microsoft offers value with a margin of safety

I believe Microsoft ($MSFT), at approximately $27/share offers value with a margin of safety on a cash flow valuation basis.  Assuming all else at $MSFT meets my standard for good business, I'd buy it today for the long term at $26.

Microsoft develops the Windows operating system and the Office suite of productivity software. Windows and Office account for roughly 56% of Microsoft's revenue, with another 24% coming from software for enterprise servers. The firm's other businesses include the Xbox 360 video game console, Bing Internet search, business software, and software for mobile devices.

I estimated the firm's WACC at 12.23% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year	FCF $Millions
2001	12319
2002	13739
2003	14906
2004	13517
2005	15793
2006	12826
2007	15532
2008	18430
2009	15918
2010	22096
TTM	23156

Average Annual Growth: approx. 8%
CAGR: approx. 7%
Consensus Forecast Industry 5-Year Growth: approx. 18% per year
Consensus Forecast Company 5-Year Growth: approx. 10% per year

Assuming the company achieves a 5-year growth rate in FCF of 9% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:

Discounted Cash Flow Valuation

Year	FCF $ Millions
0	23156
1	25240
2	27512
3	29988
4	32687
5	35628
Terminal Value	317470

The firm's future cash flows, discounted at a WACC of 12.23%, give a present value for the entire firm (Debt + Equity) of $284,434 million. If the firm's fair value of debt is estimated at $12,000 million, then the fair value of the firm's equity could be $272,434 million.  $272,434 million / 8400 million outstanding shares is approximately $32 per share and a 20% margin of safety is $26. Assuming all else at $MSFT meets my standard for good business, I'd buy it today for the long term at $26.

Sources
Morningstar.com

Microsoft.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.