Microsoft Earnings Preview: Expecting Slight Beat

Microsoft [[MSFT]] is scheduled to report their fiscal third quarter 2009 results after the market closes on Thursday, April 23. Based on our analysis, we at are expecting MSFT to report slightly better than expected results that exceed Wall Street’s consensus expectations.


Analyst Expectations

We are forecasting revenues of $14.08 billion and EPS of $.40. This would represent a 3% decline in revenues from last year’s $14.45 billion in the same period. The current analyst consensus estimates calls for revenues of $14.12 billion and $.39 EPS. Due to the “volatility of market conditions going forward”, Microsoft is no longer providing revenue and EPS guidance.


Last month, Best Buy [[BBY]] reported better than expected quarterly results and this week Intel [[INTC]] did the same. We view those both as positive indicators for Microsoft’s upcoming earnings announcement.


The lack of company guidance the recessionary environment has led Wall Street analysts to offer up relatively conservative estimates for Microsoft. Best Buy’s results seem to confirm that consumer spending has picked up and we believe that enterprise IT budgets have yet to be seriously reduced.


Share Performance

Microsoft’s shares are down only 2% since the beginning of the year. In 2008, Microsoft’s shares fell over 45%, as the stock underperformed the 34% decline in the Dow Jones index.



Shares are now trading at 10x consensus 2010 EPS estimates. This is below the relative valuations of their peer group. We believe that the market is currently undervaluing Microsoft’s shares and expect that the company will be able to meet consensus expectations unless the recession lags into 2010.


Recommendation: Buy with a $22 price target.


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