Microsoft Earnings Preview: Outlook Improving

Microsoft (MSFT: 29.50 +0.61%) is scheduled to report their fiscal second quarter 2010 results after the market closes on Thursday, January 28th. Based on analysis from EarningsPreviews.com, Microsoft is expected to report better than expected quarterly results that exceed Wall Street’s consensus expectations.

Analyst Expectations

We are forecasting revenues of $17.90 billion and EPS of $.60. This would represent an 8% increase in revenues from last year’s $16.63 billion in the same period. The current analyst consensus estimates calls for revenues of $17.83 billion and EPS of $.59.

Earnings Analysis

Following strong earnings results by IBM (IBM: 125.6598 -0.36%) and Intel (INTC: 19.957 -1.79%), Wall Street appears to be increasingly confident that Microsoft will also deliver better than expected quarterly results. Consumer demand for Windows 7 appears to be quite favorable following its release on October 22. In addition, the company’s online division is expected to benefit from Bing’s increasing market share. Our checks show that consumers increasingly used Bing’s search engine for their holiday shopping to capitalize on Microsoft’s cash rewards offer.

With enterprise spending expected to return in 2010, Microsoft’s outlook appears stronger than it has in several years. Consumer spending on technology & electronics is already showing strong signs of recovery. And Microsoft finally appears to be gaining some traction in their online segment.

Stock Performance

In 2009, Microsoft stock gained an impressive 57% as they outperformed the Dow Jones industrial average’s 19% increase. Microsoft was one of the Dow’s top performers in 2009 after disappointing investors for most of the past decade.

Valuation

Microsoft’s stock is now trading at 14x consensus fiscal 2011 EPS estimates. This is a discount to the relative valuations of their peer group. Microsoft’s improving outlook and multiple growth catalysts should lift the stock further in 2010.

Recommendation: Buy with an $32 price target

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