Earnings Preview: Microsoft Reports Fiscal Q2 Numbers Thursday

By Brendan Gilmartin

Microsoft (MSFT) is scheduled to report Q2 2012 earnings after the close of trading on Thursday, January 19. Results are typically reported between 4:05 p.m. and 4:15 p.m. EST, with a conference call to follow at 5:30 p.m. While the underlying shares tend to get some play off earnings, the technology-related ETFs -- PowerShares (QQQ) and SPDR Technology ETF (XLK) -- may also move off the Microsoft report, along with the index futures, provided the announcement precedes the CME scheduled maintenance shutdown at 4:15 p.m. EST.

Outliers & Strategy

• Microsoft usually reports a value for the measure of Earnings Per Share. The estimate is $0.76 (source: Yahoo Finance), the high end of the range of $0.68 to $0.80.
• Revenues are another critical measure for Microsoft. The figure is seen rising 5% to $20.94 billion.
• Microsoft has not provided earnings or revenue guidance since its 1Q 2009 earnings release.
• Microsoft is trading at just 10.3x trailing earnings, a steep discount to the 5-year average of 13.8x, with Forward PEG ratio of just 0.90, suggesting the shares are now trading at a discount to the earnings growth rate.

Recent News

• 01/13: Nomura Securities and Oppenheimer cut earnings estimates on Microsoft after executives at Nomura's CES conference lowered their expectations for PC shipments, according to a post on StreetInsider.com.
• 01/11: Collins Stewart cut its 2Q EPS estimate on Microsoft from $0.75 to $0.73, according to a post on Barron's. The firm also reduced its revenue forecast from $20.8 billion to $20.6 billion, citing the unexpected disclosure of the impact of the Thailand floods on the PC market a day earlier. The firm also cited decelerating software demand.
• 01/10: Microsoft CFO and Chief Marketing Officer of Windows and Windows Live Tami Reller told attendees at a conference sponsored by Nomura that the floods in Thailand will have a negative impact on the PC market.
• 12/28: Stifel Nicolaus reiterated a Buy rating and a $32 price target on Microsoft, according to a post on Benzinga.com. The firm noted the top-line impact from the industry-wide disk drive shortage should have a muted effect on earnings.
• 12/12: Goldman Sachs believes estimates for Microsoft are too high, according to a post in Barron's. The firm cited the uncertainty in the release of Windows 8 and estimating cost of goods sold.

Technical Review

Despite the recently cautious comments from members of Microsoft management on PC sales, the shares recently broke out to the highest level in close to one year, piercing through $27.25 resistance along the way. That will be a key support level to watch in the event of a pullback. Also note that the Relative Strength Index is hovering above the 70-level, an area generally considered overbought, while the MACD also looks a bit extended. Should earnings surprise to the upside (appearing more likely given the price action), there is little overhead resistance. Below $27.25, there is support down at $26.50 in the event of a weak report. (Chart courtesy of StockCharts.com.)

Summary

Microsoft shares have been breaking out in recent weeks amid optimism over the release of Windows 8 later this year, strong X-Box sales over the holiday selling period, and attractive valuation, with the forward PEG ratio below 1.0. However, skeptics are quick to point out the recent and unusual admission from a pair of executives conceding that the floods in Thailand and the impact on the hard disk drive market is expected to pressure PC sales. Interestingly, estimates have been cut by several firms, while Microsoft stock is near a 52-week high ahead of Thursday's pivotal earnings release.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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