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Nomura's Sherlund Downgrades Microsoft (MSFT) to Neutral; Honeymoon Ending

January 27, 2015 6:54 AM EST
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Price: $441.06 +1.94%

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Nomura Securities analyst Rick Sherlund downgraded Microsoft (NASDAQ: MSFT) from Buy to Neutral with a price target of $50.00 (from $56.00) saying the honeymoon is ending ant a tougher transition lies ahead.

"After a lengthy 16-month period of multiple expansion for Microsoft’s stock, we see a tougher transition ahead, and move to the sidelines with a Neutral rating on the stock, down from Buy," Sherlund sid.

He highlighted:

  • Q2 (Dec) results were a bit ahead of expectations in revenues and earnings and Cloud revenues continued to show robust growth, but underlying trends in Windows and Office suggest a more challenging transition ahead (at least through our fiscal 2016 time horizon), likely exacerbated by tougher comparisons for the next 2–3 quarters that benefited from the PC refresh cycle associated with the end of support for Windows XP.
  • We have been hopeful of one remaining catalyst, the Board decision on the potential return of cash to shareholders. Management announced that the remaining $31bn of share repurchase authorization would be accelerated and used over the next 8 quarters. This could effectively double the repurchase from an average of about $2b per quarter to $4b, not as much immediate gratification as we believe some investors might have hoped.
  • Management announced an analyst meeting for April 29th, to be webcast for interested investors not wishing to make the trip out to San Francisco to the annual Build Developers’ Conference.  Changes in Windows revenue recognition (which we had highlighted on January 26th) will reportedly be announced when the analysis is completed.
  • We reduced estimates to reflect a significantly more challenging transition ahead, with difficult comparisons ahead for traditional Office and Windows given evidence of the end of the benefits realized over the past year from the Windows XP related PC refresh cycle, some mix issues driving lower ASP’s, FX and macro issues in a few geographies.
  • Microsoft shares closed at $45 in aftermarket trading, representing 17.0x our calendar 2015 EPS estimate of $2.65 per share. If we back out the taxaffected net cash of $5.50 per share the P/E ex-cash is 14.9x. EV/uFCF for calendar 2016E is 12.1x, or 12.7x if we tax affect the offshore cash here as well. We have reduced our rating to Neutral from Buy and trimmed our price target to $50 from $56, reflecting less optimism about the pace of earnings growth during the transition of the business to the cloud.

The firm cut FY 2015 EPS from $2.83 to $2.56 and FY 2016 EPS from $3.20 to $2.89.

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 $47.01 yesterday.



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