Years in the Making, Microsoft (MSFT) Upgraded to Overweight at Morgan Stanley

(Updated - January 13, 2016 11:34 AM EST)

Morgan Stanley upgraded Microsoft (NASDAQ: MSFT) from Equalweight to Overweight with a price target of $66.00 (from $57.00). Analyst Keith Weiss -- who had Equal-Weight rating on the stock since 2013 -- noted durability of growth, operating margin expansion, and aggressive capital returns, and he has increasing confidence that Microsoft can sustain mid-teens total return.

"For the past 5 years, a struggling consumer PC business, false starts in mobile, cloud transitions and currency have kept EPS growth stagnant at Microsoft – we believe that trend line is poised to inflect upwards," said Weiss.

The analyst added, "The company enters CY16 with: 1) real top-line drivers, 2) improving margins, and 3) strong capital return. At the same time, the risk from the 'More Personal Computing' (including Windows OEM and Nokia) has come down significantly, as that segment now represents just 15% of operating income. A ~3% dividend yield and ~10% FY15-FY18 EPS CAGR, drives an ~13% total return profile for MSFT – a premium to the S&P at ~8% that we believe should drive the MSFT multiple higher."

Weiss thinks shares can advance to $85 in a bull case, or fall to $32 in a bear chase.

Discussing Morgan Stanley's base case, Weiss added ,"Top line drivers include the Azure (Microsoft emerging as a public cloud winner), Data center (share gains and positive pricing trends), and O365 (base growth and per user pricing lift). At the same time, the risks from Windows OEM and Nokia have lessened considerably. Op margins expand ~50bps in each of the next 3 years. Double-digit EPS growth, ~3% dividend yield and a commitment to share repurchases drives an ~13% total return profile and yields CY17e EPS of $3.28. At 20x EPS, MSFT trades at a premium to the S&P, but inline with its premium total return profile."

For an analyst ratings summary and ratings history on Microsoft click here. For more ratings news on Microsoft click here.

Shares of Microsoft closed at $52.78 yesterday.

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