Microsoft (MSFT)

“I’m the stock watcher for Microsoft (MSFT) and would like to e-mail a copy of my EAGLE to other members before our meeting, but haven’t been able to copy and paste it. Is it possible? Keep in mind I’m quite technology challenged.” 🙂

Let’s take this opportunity to walk through a few things … and along the way, hopefully you’ll get some materials that you can use with your fellow investment club partners.

EAGLE stands for Equity Analysis Guide to Long-Term Expectations. Or Equity Analysis Guide, in short — reflecting a summary of the most important influences, drivers and factors when studying a company in the effort to build a considered forecast. Taken collectively, it’s all about our approach to stock analysis — using a 5-year continuously scrolling time horizon. And it manifests itself in a variety of different places and applications scattered throughout the site.

We’ll cover the first here, the Company Report — this is the analysis results based on a consensus forecast of the rhino herd. We monitor analyst consensus estimates for sales, profitability and P/E ratios (in the framework of a five year time horizon) and derive a return forecast based on that consensus.

In the case of MSFT, here’s a snapshot of the Company Report right now:

Msft cr eagle 20130208

If you’re relatively new to this, we like Value Line (www.valueline.com) a lot — and we think it’s a worthy part of any investor’s arsenal.

In this case, you can become more familiar with Value Line as a trusted resource by taking a look at the company report for Microsoft (MSFT) — because it’s available for FREE as part of the Dow 30 here: http://www.valueline.com/Dow30/index.aspx

Scroll down and pull up the report on MSFT. We think that a vast majority of the time, the Value Line low total return forecast (VLLTR, shown here) should RESEMBLE the results of your study. Keep in mind that this is the Value Line analyst’s 3-5 year return forecast (based on the price forecast range … and leaning towards the low end of the forecast range.) Trust us on this one. Actual returns 3-5 years from now are more likely to resemble the low total return forecast than the average or the high. (We can prove it.)

As shown here, the 3-5 year low total return forecast is 16%. Your study results should RESEMBLE (not necessarily match) this.

And for what it’s worth, correcting for the change in stock price since this report was issued (AND the change in forecast range) … the current VLLTR for MSFT is 21.7%.

Both of these forecasts will likely be updated with tomorrow’s release of Issue 13 … Value Line updates every company every thirteen weeks or quarterly. So do we for all companies with more frequent updates for the most widely-followed companies by our subscribers and/or any material news or forecast modifications between quarterly updates.

Business Model Analysis: Sales Growth Forecast

Based on this quick analysis of top-line conditions, and barring any major shifts in the 3-5 year forecast for MSFT tomorrow morning from Value Line, we’d expect the long-term sales growth forecast to moderate, albeit slightly, to 8% … as shown here.

Msft model 20130208

Welcome To The Sandbox

That’s right. We provide you with a playground where you can conduct sensitivity analyses of the milestone assumptions and judgments during your stock study.

Sensitivity analysis? Relax. That’s just some jargon you can throw around at the next neighborhood party or the next time you slump into the chair at the hair salon. It’s just a fancy way of saying “what if?” At Manifest Investing, you can go to MyStudies and perform your own tinkering with the major parameters. We pull in the major numbers and any box with a green icon in the corner can be modified.

For example, pulling current EPS probably results in a pull of operating earnings that are not conditioned to correct for one-time events, etc. like they do for us at Value Line. In this case, when we launched the sand box, the current EPS was $1.82. A more representative current EPS can be delved from the attached Value Line quarterly data. (We switched it to $2.80 based on EPS thru 3/31/2013)

Keen-eyed observers will also pick up on a “weird” trailing 12-month sales figure for some companies. The reason for this is we’re continuously INTERPOLATING based on the analyst consensus estimates — basically constantly trying to think of revenues based on the trend line in the business model analysis. It’s one of our methods of CONTINUOUSLY updating the stocks we follow … adjusting as the days roll by AND/OR correcting for adjustments to the analyst consensus forecasts.

Modifications:

(1) EPS to $2.80
(2) Sales to $77 billion — merely rounding off.
(3) Sale growth forecast to 8% based on the previous business model trend.
(4) Payout ratio to 35% — pulling current published payout ratios are often “erratic” — and 45% was probably a little high for MSFT.

The result is an annualized return forecast closer to 20% or the high teens.

It’s been a while since we did one of these, but there’s an Excel version of the Equity Analysis Guide for those who want to dabble with other stocks, etc. or simply prefer this to the MyStudies module.

Here’s what it looks like for Microsoft (MSFT):

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