BMO Raises Estimates and PT on Microsoft (MSFT)

BMO Capital analyst, Keith Bachman, reiterated his Outperform rating on shares of Microsoft (NASDAQ: MSFT) and raised his price target to $62 from $57. MSFT's report was generally positive, especially since investors expected September Q guidance to be below consensus. FCF generation should be highlighted since it increased 15% y/y in the June Q and 7% y/y in FY2016. Further, operating cash flow increased by more than 13% y/y, with capex limiting FCF growth in FY2016. With capex expected to moderate in FY2017 and FY2018, The analyst believes that FCF can continued to grow for several years. The analyst projects FCF growth of 5-8% y/y in each of the next two years, which will help support valuation.

In his preview, the analyst had suggested that September Q estimates were too high. Revenue guidance at the mid-point is ~$300 mm below consensus. However, the operating margin is expected to be ~31.6% vs. his prior estimate of 29.7%. In addition, management is guiding other income to be $0 vs. his estimate of -$165 mm, and the tax rate to be 20% vs. his estimate of 21%, which adds more than $0.02 to EPS in the September Q. Net, our September Q EPS estimate is $0.70 vs. our prior estimate of $0.64. We are raising our FY2017 EPS estimate from $2.74 to $2.84 and our FY2018 EPS estimate from $2.95 to $3.09.

The analyst is raising his FY2017 FCF estimate from $24.2B to $26.1B and raising his FY2018 FCF estimate from $25.0B to $28.3B.

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 $53.09 yesterday.

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