How to Research a Stock in Stock Rover Part II – vs Peers

Overview

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:

• Part 1 – Doing a deep dive on a stock using the Insight Panel
• Part 2 – Comparison with peers using the Table
• Part 3 – Price performance and technicals using the Charting facility

In this blog post we will be comparing Microsoft to some of its peers using the Stock Rover Table.

Who are Microsoft’s Peers?

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 (behind NVIDIA). Fortunately, the company with the third largest market cap, Apple, is definitely a peer. The two companies compete directly in both software and hardware. But Apple does phones big time 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 fourth 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), which has the fifth largest market cap, 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 Table

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 folders. Each folder has a theme such as Dividends, Price Performance, Profile or Valuation. Within each folder is a set of views. For example, within the Price Performance folder are the views Current Returns, Historical Returns, Industry and Sector Returns, and Returns vs. the S&P500.

A specific View will focus 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 over 50 “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 50+ views, we will focus on a handful for our comparison.

You can get to the Table by clicking on the Table button in the Navigation panel as shown below.

Financial Health

We will begin with the Financial Health View, which is stored in the Fundamentals View folder. 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 ticker. Let’s begin with Net Cash as a % of Market Cap, highlighted in green, furthest to the right. This metric gives an idea of the strength of the cash situation of each company. We can see that Google and Salesforce are the leaders here with cash being 2% of their market cap. Google has just under $5 in net cash per share. And of this writing, its share price is $251, which gives us our 2%. Microsoft and SAP both are 1% net cash per share. The laggards are Oracle at -11% and IBM at -21%. That is a little worrisome, especially because IBM is by far the biggest dividend payer of the group, which means lots of cash out the door every quarter.

In other measures, such as Morningstar Financial Grade, highlighted in light blue, all but two companies are rated A. No surprise, but Oracle and IBM, the worst performers by the net cash metric, are rated B, which isn’t bad, just not stellar.

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 Oracle just barely at 3. Somewhat surprisingly CRM achieves a perfect 9, followed by Apple, Adobe and SAP at 7. Microsoft at 6 is good, but not great.

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. Here IBM is close to the concern level with a score of 3.3. Oracle is not much better at 4.1. Google is the leader at 15.7. Both Apple at 11 and Microsoft at 10.1 also join the double digit club.

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. Fortunately none of our companies get pinned with this ignominious award.

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 Google and Oracle are the only two companies that are not in the desirable zone, which is between -10% and 10%.

So to sum up what we have learned, Microsoft and its tech peers are generally extremely strong financially. Each company’s performance varies across the different metrics, but it seems that Oracle and IBM, which are still solid financially, are not quite as strong as the others in the group.

Valuation

Now let’s take a look at valuation beginning with the Basic Valuation view. 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.

The Past

Let’s begin by reviewing past performance.

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, Adobe has the cheapest (best) valuation of the group with an earnings yield of 4.4%. Google is second at 3.7%. Microsoft is at 2.7%, which is slightly above 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 see that Adobe is also the winner here, with again Google in second place. And again Microsoft is slightly above average.

One more metric that is worth looking at is Price / Free Cash Flow, highlighted in red. Free cash flow is a critical measure for the financial health and wellbeing of a business. Again we can see that Adobe is the least expensive company by this measure with a value of 16.3. Salesforce is not far away at 18.9. Microsoft is considerably more expensive on a free cash flow basis at 53.2. This high value is somewhat surprising. It is due to the fact that Microsoft’s free cash flow is only 70% of its net income. This can be seem in the Cash Flow Valuation view, shown below.

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, 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.

The Future

Let’s go back to our basic valuation view and highlight a couple 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.

Here, Google is the least expensive company by this measure, at 1.1. Adobe is next at 1.3. Microsoft is fourth at 1.9. Surprisingly Apple is not so great at 2.7. Note that Microsoft’s forward P/E is 28 and Apple’s even higher at 31.9. However analysts expect Microsoft to grow earnings at over 17%, whereas Apple is only around 8%. In the analyst world, Microsoft is a much better value than Apple, based on current earnings and future earnings expectations.

This one metric tells us a lot.

Looking at just Forward P/E, highlighted in blue, we find that Adobe continues to be our value leader at 15.5. Among the big three, Google is the cheapest at 23.7. As mentioned previously, Microsoft is 28 and Apple is 31.9. However, Google’s earning growth going forward is the lowest of the three at 6.7%: lower P/E coupled with lower growth, just as one would expect.

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.

Growth

We got a taste of growth in the Valuation section with the PEG Forward metric. Let’s use the Future Growth View in the Table, which is found, oddly enough, in the Growth view folder. Let’s use this view to delve a bit deeper into growth.

The column I want to focus on is the 5 year expected earnings growth rate, highlighted in green. Of course looking 5 years into the future is quite far from a sure thing, but the numbers do require analysts to do their best thinking about the long term prospects and hence earnings growth rate of the companies they follow. This in turn is critical to the valuation and stock price a company is awarded by the market.

We can see the company with the highest expectations for earnings growth is Google at 24.3%. Microsoft is second 17.7%. This is definitely surprising because you may recall that Google has the worst earnings growth expectations for next year. So the analysts think next year may not be great for Google, but beyond, all is sunshine. If the analysts are right about this, Google looks to be quite a good deal within this group as it has the lowest PEG forward at 1.1. Microsoft is at 1.9

Now, switching from the Future Growth view to the Growth view, let’s look at average annual sales and EPS growth over various past periods as shown below.

I have highlighted the average EPS growth over the last 5 years in green. Here we can see that Google has been the fastest earnings grower at 32.8% per year. Microsoft is third behind Salesforce at 18.8% per year. It is interesting to discover Google is the fastest earnings grower in the group, past and future, but hasn’t been rewarded valuation wise as much as its peers.

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 a bit above average for the group at 11.6%. Quite a bit better than Apple at 6.2%, but again not nearly as good as Google at 18.2%. For well-run companies, sales growth drives earnings growth.

Note that in absolute terms, annual average revenue growth of over 10% per year is superb for a company when it is sustained over 10 years. This demonstrates that the growth label applied to the tech sector does indeed have plenty of 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 14.5%, and that growth is well above average for the group. Only Salesforce at 15.3% and of course Google at 17.5% have done better.

So, we are looking at Microsoft, but it is hard not to notice that Google, in addition to sporting a better valuation than Microsoft, is also exhibiting faster growth, both historically and for what is expected in the future. Even though Microsoft looks very good so far, Google looks even better.

Profitability

Let’s now look at profitability via the Profitability View, which is in the Fundamental view folder.

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 59.3%. Microsoft is fourth best at 27.5%. Google is slightly better at 29.1%. The group average is 23.3%. 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 0.7. The group average is 0.4, which is also where Google is. Microsoft is below average at 0.3. Apple is much better at 0.6. This metric is making me pay a little more attention to Adobe, which has also done well with a number of other metrics.

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 45.6%. The group average is 30.3%. Apple and Google, both check in slightly above that in the low 30%. This is a major point in favor of Microsoft.

Historical Profitability

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 the 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 2015 to 2017, Microsoft’s operating margin was in the mid-20’s and not improving.

Then in 2018 the metric turned northward and has improved considerably every year since, save 2022 (Covid). 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 similarly improved significantly from 2017.

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-oriented, 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.

Returns vs. S&P 500

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 found in the Price Performance View folder and 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 Oracle has done by far the best in the last year from our peer group, outperforming the S&P 500 by a whopping 73.3%. The numbers we have been looking at don’t give any hint of this. So what happened?

In short the Oracle Cloud Division recently racked up some major wins in the AI space for cloud computing and AI infrastructure. This has dramatically transformed the perception of Oracle from a solid, but slow growing database vendor to a huge player in the exploding AI space. This in turn has resulted in an expansion of their P/E from the 30 range to over 70. It will be interesting to see if the numbers we have been looking at catch up to these new heightened investor expectations.

The other big outperformer is Google at +38.4% vs. the S&P 500. We have been seeing great numbers for Google in the tables we have examined, so this comes as much less of a surprise.

And Microsoft? Well, it is fourth, slightly outperforming the S&P at +0.5%. A very good result, especially considering that the S&P has returned around 18% in 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, Adobe, even though they have some good numbers, has not been a good investment over the last 5 years. Unless there is something unexpectedly good in in its future, its performance begs the question of why invest in Adobe vs just buying one of the S&P 500 ETFs like SPY, VOO or IVV. Similar things could be said of Salesforce.

This table shows you a lot about stock price performance over time in an easy-to-digest format.

Research Shortcuts

Grades

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, which is found in the Ratings folder, and is 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, Microsoft and Google all scored well.

If we focus on the Profitability Industry Decile metric, highlighted in red, we see that those are three of the five companies in the group that scored in the first decile, the other two being Adobe and Oracle. 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.

Stock Ratings

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.

Conclusion

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 researching 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.