Microsoft Corporation (MSFT) Has Recipe for Compounding Success

March 16, 2015

Lead Portfolio Manager Matt Moran of River Road Asset Management says there is a misunderstanding in the investment community in terms of Microsoft Corporation’s (MSFT) business and what is driving the company.

“Some investors think that Windows is really driving the bus here, but it’s not. In fact, consumer Windows is just 6% of total sales and business; Windows is more like 11% and actually growing. If you value the company based on the cash flows that come from the Office division and the servers business and then add back the cash, you get to a low $40s value. The stock ended 2014 in the mid $40s,” Moran said.


Moran says that at the end of the year Microsoft was trading at 11 times free cash flow and 8 times EV to EBITDA, which is very cheap. He also likes the company because of its AAA credit rating.

“Why is that important? Because they can issue $10 billon of 40-year debt with a 4% coupon. Think about that financial arbitrage — they are issuing debt at 4% for 40 years, and they are buying back stock aggressively that earns 25% to 30% on equity. We think that is a great recipe for compounding success when it comes to Microsoft in the future,” Moran said.