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Microsoft (MSFT): Top Large-Cap Value Pick

 May 15, 2012 05:56 PM

(By Manikandan) Shares of Microsoft Corp. (NASDAQ:MSFT) are expected grow at least 20 percent in the next few months as the software giant's high-margin products are set for upgrades, thereby boosting its financials.

Redmond, Washington-based Microsoft's revenue and EPS growth are poised to reaccelerate, and there is potential for Wall Street estimates to move higher as its high-margin products such as Windows is gearing for an upgrade in the next 18 months.

Wall Street expects Microsoft to earn $2.72 a share on revenue of $74.31 billion for fiscal 2012, according to analysts polled by Thomson Reuters. The current consensus estimate implies just 1 percent growth in earnings and 6.5 percent growth in revenues.

However, Microsoft should experience significant growth in topline and bottom line in fiscal 2013, when its Windows 8 and server products would see sizeable upgrades, enhancing revenues. Street expects Microsoft to earn $3.04 a share on revenue of $80.63 billion, representing a growth of 12 percent in earnings and 8.5 percent in revenue.

Windows 8, which is considered as one of the biggest overhaul of Windows operating system, is expected to be available likely in late September or early October. Windows 8 offers the Metro interface designed for touchscreen input – a feature that Microsoft already deployed in its Windows Phone and on the Xbox 360. A version of Windows 8, called Windows RT, also adds support for the ARM processor architecture, in addition to chips from Intel and AMD.

Microsoft is leaning heavily on Windows 8 consumer adoption with a focus on consumer Metro apps to strengthen its position in tablets, which is a consumer-oriented market.

In addition, Microsoft is also working on Windows Server 8, which is expected late in the third quarter or early fourth quarter. It would have several changes including a big Hyper-V enhancement. In a nutshell, Microsoft is taking everything it's learned about the cloud and brought I in to Windows Server 8.

For instance, users will be able to choose whether they want to keep their data on the premise in Windows Server or move workloads to the Cloud.

There will also be a cheer for value investors as Microsoft would increase its dividends, helped by strong generation of free cash flow via its product cycle. Microsoft's current dividend yield works out to 2.3 percent and has a payout ratio of 26 percent, implying there is room for further upside.
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