360 for '06

01/20/2006 12:00 am EST

Focus:

Mark Mowrey

Senior Analyst, Al Frank Asset Management

"We're not short-term investors; we operate on a three-to-five-year timeframe," emphasizes Mark Mowrey, whose TechValue Report is the latest addition to the top-performing Prudent Speculator family. "Still," he says, "we have our favorites." Here's the one that tops his list.

"Topping our list at the beginning of this year is software powerhouse Microsoft (MSFT NASDAQ). The current high-teen year-and-a-half out earnings multiple doesn't reflect what we believe remains ample growth prospects for a company that continues to lead the great majority of tech companies in flexibility, innovation, and earnings growth. And this year we think will prove a significant milestone in the company's march to broaden its influence beyond the PC with products that look much less like work and much more like fun.

"Serving as the core of this effort will be Microsoft's next-generation desktop operating system (OS), called Vista, which the company previewed in Las Vegas in early January, where it demonstrated many of the features-not necessarily new, but far more refined-available in the release, scheduled to hit the shelves later this year. For example, the OS greatly enhances the ease with which one sets up home networks, be they wired or wireless. That ease of setup and operation will enable far more users to take advantage of what are perhaps the OS' most attractive features- their handling of home media.

"Audio and video are made easily accessible to a host of non-PC products, further increasing broad access to media libraries throughout the home. One such device is the newest video game console offering from Microsoft, the Xbox 360, which was easily the most sought after device this past holiday season. Supplies were far shorter than potential buyers would have liked, but another contract manufacturer has been added to the lineup, though, and Microsoft now expects to sell between 4.5 million and 5.5 million 360s by June of this year.

"Crammed with incredible 'game changing' (pun intended) technology and features, the 360 promises to solidify Microsoft's platform extension from the den to the living room. Not only offering the best gaming experience out there, the 360 also serves as a highly competent media hub. Meantime, the games are great, while the company's best-of-breed online gaming service, Xbox Live, greatly builds upon the success of version 1.0 and remains a fine example of how Microsoft can exceed competitive offerings by great leaps.

"An important thing for any investor to remember, the electronic device marketplace remains one of design and software, with key differentiators being how the user interacts with the device via the user interface. King-of-software Microsoft has shown with its latest products that it certainly understands these facts and has been hard at work trying to adhere to their confines.

"As importantly, we would even argue that Microsoft's other notable recent initiatives-including the shift to make available some of the power of the Office suite on the Internet via Windows Live and its choice to collaborate with Yahoo in instant messaging- suggest the company is now more willing to learn from others, such as Google, even as it innovates from the inside. That subtle shift, we believe, means Microsoft will likely continue to grow in other not-so-obvious ways.

"With much of the momentum yet to be generated from its new releases, we find most arrows pointing up for Microsoft as we head into the new year. Microsoft retains ample cash to continue to fund ongoing growth, and the 1.3% yield on the stock and a recently hastened share buyback plan pay us to wait for other investors to see the light. At about 18 times fiscal 2007 (ending June 2007) earnings estimates, according to Reuters Estimates, we find the stock an attractive addition to any highly diversified portfolio needing some tech influence. Our current target price is $43."

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