This is the second of a three part series designed to show you how to effectively use Stock Rover to research a stock. We will be using Microsoft (MSFT) as our example company.
The three part series focuses on researching a stock in the following sequence:
In this blog post we will be comparing Microsoft to some of its peers using the Stock Rover Table.
If we are going to compare Microsoft to its peers, the first step is finding suitable peers for Microsoft.
This, of course, is no easy task because Microsoft has the second largest market cap of any company on the planet. Fortunately, the company with the largest market cap, Apple, is definitely a peer. The two companies compete directly in both software and hardware. But Apple does phones big time (hence the larger market cap) and is starting to put a footprint into TV and movies, so the two companies are not an exact match, but certainly close enough.
The third biggest company by market cap is Alphabet, which is more commonly known as Google, and is what we will call it for the remainder of this blog. There is a lot of overlap between the products and services provided by Google and Microsoft, including search, cloud, and computing software and hardware.
Then there are other smaller companies like Adobe, Oracle, SAP, Salesforce and IBM that aren’t exactly the same, but have significant overlap, so we will include them so the list size isn’t just three.
Amazon (AMZN) has a lot of overlap with Microsoft in cloud services, but beyond that, their businesses rapidly diverge, as Amazon, besides cloud, is fundamentally a retailer, so I won’t include them.
So for the purposes of this blog, I have created a watchlist called Microsoft and Peers, and it contains the tickers of the peer companies mentioned above, which in alphabetic order are; AAPL, ADBE, CRM, GOOGL, IBM, MSFT, ORCL and SAP.
The Stock Rover Table excels at comparison, and it will be our primary tool for the purposes of this blog. The table is organized into a set of Views, where each View focuses on a specific area of financial, operational or price performance, and contains a corresponding set of metrics that are the columns in the table.
Views are user definable, but Stock Rover ships with 22 “factory” views. Most users find the factory views to be well organized and complete, and just go with them. That is what we will do. Of the 22, we will focus on a handful for our comparison.
We will begin with the Financial Health View. We found in part 1 of the blog that Microsoft is an exceptionally financially strong and healthy company. It will be interesting to examine its peers and see if they are as healthy, or if financial health is a significant competitive advantage for Microsoft.
If you are thinking of investing in Microsoft, you are also probably also thinking about Apple and Google, as those three together are the real big dogs of the tech space. So we will pay particular attention to how Microsoft stacks up against those other two.
The screenshot below shows the financial health table for Microsoft and its peers.
I have sorted the table by Net Cash as a % of Market Cap, highlighted in green. This metric gives an idea of the strength of the cash situation of each company. We can see that Google is by far the leader here with cash being 7% of its market cap. Google has $156 in net cash per share. And of this writing, its share price is $2156, which gives us our 7%. Microsoft is next at 2%, then Adobe at no net cash. For all the other companies in the peer group, their debt exceeds their cash. Oracle and IBM are especially worrisome at -29% and -38% respectively.
In other measures, such as Morningstar Financial Grade, highlighted in light blue, all the companies are rated B or better, with the big three – Apple, Microsoft and Google – netting an “A” rating.
The Piotroski score, highlighted in navy, is a critical measure of financial strength. It is measured on a scale of 0 to 9. The higher the score the better. A score under 3 is worrisome. Here we can see all our companies clear that bar, though Salesforce just barely at 3. Unsurprisingly, Apple, Microsoft and Google achieve the highest score, with all at 8 out of 9.
We next consider the Altman Z score, a measure of credit strength, highlighted in red. A score below 3.0 is a cause for concern. Salesforce is right at 3.0 and IBM is at 2.9. Oracle is even more of a concern at 1.4.
Another key statistic to consider is the Beneish M score, highlighted in orange, This statistic is a measure of the likelihood of accounting manipulation. The Beneish M score is a little counter intuitive in that higher values are worse and the values are negative. A value above -1.78 has historically translated to market underperformance. Salesforce comes up as the only company of concern with this metric.
Finally, we will look at the even more esoteric Sloan Ratio. Highlighted in purple, it is a measure of companies that have high accrual ratios. This means the companies have high non-cash income or expenses. Like the Beneish M score, High Sloan Ratios have translated to long term underperformance in the market. Here we find that Oracle and Salesforce are the two companies that are not in the desirable zone, which is between -10% and 10%.
So to sum up what we have learned, in general Microsoft and its tech peers are generally very strong financially. Google is, by a wide margin, the strongest company financially. Then comes Microsoft, also very strong. Apple is no slouch either. The weakest companies are IBM and Oracle. Salesforce also has areas of concern with its weak Beneish M score and Sloan Ratio.
Now let’s take a look at valuation. Tech stocks are traditionally thought of as growth stocks, and hence often sport an elevated valuation relative to stocks that come from what are considered “slower growth” sectors such as Industrials or Finance. We begin with the Valuation View.
The Valuation View has an insane number of columns, and is best viewed by horizontally scrolling the table as needed. For the purposes of this blog, I have taken two screenshots of the Valuation View, the left side and the right. Let’s begin with the left side, which focuses on past performance, as shown below.
This table is sorted by Earnings Yield, highlighted in green, which is the inverse of the Price to Earnings ratio. It gives you an idea that if you invest $100 dollars in a stock, how much will you get back in annual earnings, given the current earnings level of the stock. We can see that, somewhat surprisingly, Google has the cheapest (best) valuation of the group with an earnings yield of 5.0%. Apple sports a somewhat better than average valuation with an earnings yield of 4.1%. Microsoft is at 3.5%, which is average for the group.
An alternate way to look at valuation is EV/EBITDA, which is short for Enterprise Value divided by Earnings Before Interest, Taxes, Depreciation and Amortization. This metric is useful for comparing valuations regardless of capital structure. Lower EV/EBITDA values indicate less expensive valuation.
We have highlighted this statistic in blue. We can that we see SAP nudges ahead of Google, for the mantle of best valuation. Microsoft is again around average and Apple is again is a bit less expensive than Microsoft.
One more metric that is worth looking at is Enterprise Value / Free Cash Flow, highlighted in red. Free cash flow is a critical measure for the financial health and wellbeing of a business. Again can see that Google is the least expensive company by this measure with a value of 19.1. Apple is not far away at 22.6. Microsoft is considerably more expensive on a free cash flow basis at 30.6.
There are a number of more exotic measures of valuation including Greenblatt Earnings Yield, Price to Graham Number, Price to Lynch Fair Value and, Yacktman Forward RoR that I won’t cover in this blog. However the Stock Rover explain facility gives more detail on each of these metrics.
The explain facility is reached by hovering your mouse on the column header, and then clicking on the down arrow that appears, and then selecting Explain from the ensuing menu as shown below.
In general these more esoteric metrics can be summed up by saying that Google generally sports the best valuation in the group and Microsoft is generally in the middle somewhere.
Let’s venture over to the right side of the table and pick up a few more valuation metrics. These metrics focus on the future, meaning what the analysts are projecting for each company’s future performance.
The all singing, all dancing metric for future valuation is PEG Forward. I have sorted the table by this metric and highlighted it in green.
With PEG forward, the lower the number, the better. The metric incorporates the expected P/E for the next 12 months divided by the estimated Earnings Per Share (EPS) growth for the next 5 years.
Again Google is the least expensive company by this measure, along with IBM, at 1.1. Microsoft is pretty good at 1.7. Surprisingly Apple is not so great at 2.6. Note that Microsoft’s Forward P/E is 25.1 and Apple’s is less at 22.7. This means that the analysts are expecting significantly higher earnings growth from Microsoft relative to Apple over the next 5 years.
This one metric tells us a lot.
Looking at just Forward P/E, highlighted in blue, we find that Google continues to be our value leader among the big three at 16.9 vs. Apple at 22.7 and Microsoft at 25.1. With a lower forward PE relative to both Microsoft and Apple, Google again seems to be the best deal of the big three.
Note that IBM at 13.3 and Oracle at 13.8 sport the lowest Forward P/E valuation of the group.
There are other metrics of interest, such as the Price to Sales and Price to Book ratios. But when valuing tech companies, these two metrics tend to be less relevant than the earnings trajectory. It is fair to say that by P/S and P/B, none of the big three are particularly cheap.
We got a taste of growth in the Valuation section with the PEG Forward metric. Let’s use the Growth View in the Table and delve a bit deeper into this area. The first screenshot includes the leftmost columns of the Growth View.
The column I want to focus on is next year’s expected earnings growth rate, highlighted in green. Analysts are certainly much more reliable when they look a year into the future vs. five years. Companies generally give analysts reasonably accurate information on what they expect to book and spend, making the analyst models a reasonably good predictor for the upcoming year.
We can see the fastest growing technology company in our peer group by earnings is Salesforce at 23.9%. Surprisingly, Google is next at 19.0%. Surprising because we have determined in the previous sections that Google is the least expensive company in the group and has a fabulous balance sheet.
Microsoft is slightly above average at 15.6%, which is not as good as Google, but it’s a lot better than Apple at 6.8%.
Turning toward rightmost columns of the Growth View, we are looking at average annual sales and EPS growth over various periods as shown below.
I have highlighted the average EPS growth over the last 5 years in green. Once again we can see that Salesforce has been the fastest grower at an astonishing 50.7%. Microsoft is second at a still blistering 33.3% per year average.
We got a hint of this in part 1 of the blog, when we were looking at the Insight Panel EPS tab. We could see a dramatic acceleration of revenue and earnings starting around 2017.
One thing critical to earnings growth is sales growth. If sales don’t grow, it’s pretty tough to grow earnings. When I look at the average annual sales growth over a 10 year period, highlighted in blue, I see that Microsoft is around average for the group at 10.2%. It is also similar to Apple at 10.5%.
Note that on absolute terms, annual average revenue growth of over 10% per year is a very good number for a company when it is sustained over 10 years. This demonstrates that that the growth label applied to the tech sector does indeed have some merit.
It gets more interesting when I look at the last 5 years, highlighted in red. Here we can see that Microsoft has accelerated its sales growth to an annual rate of 17.1%, and that growth is well above average for the group. It has also shot past Apple’s growth figure of 11.8%. However it still trails Adobe at 21.3%, Google at 23.3% and Salesforce at 24.5%.
So, we are looking at Microsoft, but it is hard not to notice that Google, in addition sporting a better valuation than Microsoft, is also exhibiting faster growth. Even though Microsoft looks very good so far, Google looks even better.
Let’s now look at profitability via the Profitability View, shown below.
There are a lot of great metrics in this table. I will focus first on my favorite, which is ROIC (Return on Invested Capital), highlighted in green. ROIC is used to determine how well a company generates cash flow relative to the capital it has invested in its business. It is a critical metric to determine if the company is a good capital allocator or not.
Here we see that Apple is the best in the group by a wide margin at 55.9%. Microsoft is second best at 33.3%. Google is at 26.5% and the group average is 22.4%. All three of these dominant tech companies are excellent capital allocators. Of course, smart capital allocation was one of the major factors that made them dominant in the first place.
Another key statistic in company performance that I want focus on is Gross Profits / Total Assets, highlighted in blue. A finance professor named Robert Novy-Marx from the University of Rochester determined this metric was well correlated with positive stock performance.
We see that Adobe is the king here with a value of 0.6. The group average is 0.4, which is also where Microsoft and Google are. Apple is 0.5. What is interesting is that a much weaker company, IBM, trails at 0.2, as does Salesforce, also at 0.2, and which also got a very poor grade on ROIC.
The last metric I want to look at is operating margin, highlighted in red. This indicates how profitable the business is, given a dollar of revenue. Companies that have high operating margins are often well run, wide moat businesses.
Here we see that Microsoft reigns supreme at 42.6%. The group average is 24.8%. Apple and Google, both check in at around 30%. This is a major point in favor of Microsoft.
You can use the historical data capability to see how Microsoft is doing over time across key metrics. The historical table is reached by right clicking on the ticker in the table and selecting Historical Data from the ensuing menu, as shown in the screenshot below.
When you select Historical Data, you get the following table.
Here you can see Microsoft’s profitability data over time. I have selected calendar years, but you can do Trailing Twelve Months or Quarterly history as well. You can also swap rows and columns, and sort any column, ascending or descending.
I have highlighted the Operating Margin column in green. I was interested in evolution of this metric over time because Microsoft was so much better than all its peers at generating margin. When you look at this, you see that from 2012 to 2016, Microsoft was not doing well. Their margin was deteriorating every year, which is not a healthy situation for the company or the stock.
Then in 2017 the metric turned northward and has improved considerably every year since. This is an operationally impressive achievement, and it has been reflected in the ascending stock price.
Other key metrics like ROIC, highlighted in blue, have followed a similar trajectory.
Microsoft made a major change in 2014, bringing a new CEO with a new cultural and operating philosophy. The new CEO, Satya Nadella, emphasized collaborating with competitive companies and technologies. He also worked to change the corporate culture to establish a more growth orientated, open, learning based and empathetic environment.
It took a couple of years for the changes to show results, but show results they certainly have. A strong CEO and management team is a critical factor when considering whether to invest in a company. Microsoft clearly has this in spades, as the numbers indicate.
The last table we will look at is one of my personal favorites, as it shows the returns of Microsoft vs. its peers and vs. the pre-eminent benchmark, the S&P 500. The Returns vs the S&P 500 Table is shown below.
I have highlighted the 1 year return vs. the S&P 500 column in green. A one year period gives you a feeling as to whether the stock has some recent durable momentum.
We can see that Apple has done the best in the last year from our peer group, outperforming the S&P 500 by 19.8%. Microsoft is second at 10.2%. The only other outperformer vs. the S&P 500 is IBM at 6.2%. The peer group as a whole has underperformed the S&P 500 by 5.3% over the last year.
One of the things I like about this table is the color coding. I can get a sense of how a stock is doing against a key benchmark by just seeing how much red and green there is. For example, SAP has been a terrible investment. It is red in every period, save one, vs. the S&P 500. A performance like that begs the question of why put any money in SAP, when you could just buy one of the S&P 500 ETFs like SPY, VOO or IVV.
Similarly, Salesforce has not been a good investment over the last 5 years, whereas both Apple and Microsoft have been excellent. We should add the caveat that, thus far, 2022 has not been kind to tech stocks. There has been a strong rotation out of tech, probably due to valuation concerns and rising interest rates.
This table shows you a lot about stock price performance over time in an easy to digest format.
We have covered a lot of ground in evaluating Microsoft vs. its peers across a variety of financial health, valuation, growth, profitability and price performance metrics. And I admit, it’s a lot to take in.
If you want a shortcut to all this research, look no further than the Grades view, shown below.
This view summarizes with letter grades and decile rankings much of what we have covered in the prior sections. For example, we discovered in the profitability section that in various measures Apple, Adobe, Microsoft and Google all scored well.
If we focus on the profitability Industry Decile metric, highlighted in green, we see that those are the four companies in the group that scored in the first decile. This is a nice shortcut to the profitability conclusions we reached.
Other grades cover financial health, growth, valuation, and dividend yield for those stocks that pay dividends. The metrics include both Stock Rover’s calculated deciles and Morningstar’s letter ratings.
If you were going to go to just one place to compare companies, the Grades View would be the place to go.
Another shortcut for analyzing Microsoft and comparing it to its peers is the Stock Ratings facility of Stock Rover. You can read about this highly useful research resource in detail in a separate blog post.
Microsoft looks to be a pretty solid investment. It is better than its peer group by most measures. It is very strong financially. Operationally, it is a superb business. Plus its stock price performance has been very good over the long haul. What’s not to like?
Before we close the book on research Microsoft, we need to look at one last thing: Technicals. Because as the saying goes, charts never lie. Next up, the third and final blog post in this series.
Excellent presentation of Important information
Agree – excellent article providing a starting point for navigating the vast array of data, views and charts. I will adapt, and also think it would be good to have similar articles to examine different investment scenarios, eg stable investing for dividends, investing in times of recession or high growth. This would help accelerate muddling through the data and discovering some new paths over time, especially for people new to the service.
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