Microsoft Corporation: $MSFT Cash Flow Valuation Update

Current Price: ~ $30/share
Yield: ~ 2.62%


Microsoft develops the Windows PC operating system, the Office suite of productivity software, and enterprise server products such as Windows Server and SQL Server. The Windows PC and Office franchises collectively account for nearly 60% of the firm's revenue, and the server and tools business contributes 25%. The firm's other businesses include the Xbox 360 video game console, Bing Internet search, business software, and software for mobile devices.           

Estimated WACC for the firm today is 11.37% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year	FCF $Millions
2003	14906
2004	13517
2005	15793
2006	12826
2007	15532
2008	18430
2009	15918
2010	22096
2011	24639
2012	29321

Average Annual Growth FCF: ~ 9%

CAGR FCF: ~ 8%

Consensus Forecast Industry 5-Year Growth: ~ 20% per year

Consensus Forecast Company 5-Year Growth: ~ 9% per year

Internal Growth Rate: ~ 10%

Sustainable Growth Rate: ~ 21%

Scenario 1
Average FCF (2012, 2011, 2010) is $25352 million

• Start at $25352 million FCF
• Assume a 5-year growth rate in FCF of 9% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	25352
1	27634
2	30121
3	32832
4	35786
5	39007
Terminal Value	373815

The firm's future free cash flows, discounted at a WACC of 11.37%, give a present value for the entire firm (Debt + Equity) of $337022 million. If the firm's fair value of debt is estimated at $13200 million, then the fair value of the firm's equity could be $323822 million.  $323822 million / 8380 million outstanding shares is approximately $39 per share and a 20% margin of safety is $31/share.

Scenario 2
All else being equal,

• Assume a 5-year growth rate in FCF of 4% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	25352
1	26366
2	27421
3	28518
4	29658
5	30845
Terminal Value	282032

• Present Value of the entire firm (Debt + Equity): $268277 million
• Value of Equity: $255077 million or $30/share
• 20% margin of safety is $24/share

Sources

Morningstar.com

Yahoo! Finance

Microsoft.com

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