Microsoft Corp. Chief Executive Officer Steve Ballmer, whose botched bid for Yahoo! Inc helped drive the stock down 20 per cent since February, is about to make it up to shareholders with a buyback of as much as $20 billion, according to a top-rated software analyst.
Investors should buy now, while Microsoft is trading at the lowest estimated price-earnings ratio since the world's largest software maker went public 22 years ago, said Heather Bellini of UBS AG, ranked the best software analyst by Institutional Investor magazine in 2007.
She expects Microsoft to complete the repurchase — at least five times larger than its average per quarter in the last fiscal year — over the next three months.
“They won't announce it until it's done,” Bellini said.
A buyback of between $15 billion and $20 billion would lift earnings per share by as much as 10 cents annually, Bellini said.
She expects shares of the Redmond, Washington-based company to climb 53 percent to $40 in the next year.
Microsoft slowed the pace of repurchases to $12.4 billion in the fiscal year ended June 30 as it tucked away cash to buy Sunnyvale, California-based Yahoo. Chief Financial Officer Chris Liddell called the stock price ``incredibly frustrating'' at an analyst meeting last month and said a buyback ``makes more sense than it ever has.''
Liddell wouldn't say how much the company might spend each quarter this year. Charly Tracy, director of investor relations, declined to comment further.
Microsoft rose as much as 2.1 percent. The shares gained 41 cents to $26.62 at 9:32 a.m. in Nasdaq Stock Market trading.
`Larger the Better'
Analyst Jane Snorek at First American Funds in Minneapolis said she has lost confidence that Ballmer will ever get it right on Internet businesses. Her firm sold most of its stock after the unsolicited $44.6 billion bid for Yahoo was announced on Feb. 1. Only a big buyback will change her mind, she said.
``The larger the better,'' Snorek said. ``Beyond that, I don't see any catalyst.''
Microsoft's online-services unit is facing its third reorganization in three years after the departure of division president Kevin Johnson, an architect of the Yahoo bid.
The Internet business lost $1.2 billion in the last fiscal year. Ballmer told analysts at the July meeting that Microsoft would need to spend at least that much every year just to match Google Inc.'s research and development -- and more for marketing.
No Catching Google
``They missed earnings because they spent too much; they lowered guidance because they are going to spend too much,'' Snorek said. ``They can't catch Google. They're wasting money on a battle that they've already lost.''
Microsoft ended the Yahoo bid in May after a sweetened offer was rejected. Ballmer then pursued the purchase of Yahoo's search business before giving up.
Investor preoccupation with the company's Web failures has overshadowed Microsoft's Windows, Office and server-software businesses, which make up 81 percent of sales. Profit rose 14 percent last year at the Windows unit, 26 percent at server software and 15 percent at the division that includes Office.
The shares have fallen too much given the strength of the biggest parts of the business, said Eric Beyrich, a senior portfolio manager at New York-based Loews Corp., the holding company run by New York's Tisch family. He has been buying.
``There are very few times that you have such a great business that's so cheap and so misunderstood,'' Beyrich said.
Underperforming Peers
Microsoft's price-to-cash-flow ratio is 11.3, below the 18.4 average for U.S. software companies, according to Bloomberg data. The estimated price-earnings ratio is 12.2, versus 14.8 for the Standard & Poor's 500 Index. Earnings per share grew 18 percent last quarter, excluding a charge in the year-earlier period. For S&P 500 companies' that had reported through July 29, per-share profit had declined an average of 24 percent.
Ballmer needs to prove to investors that increasing their returns is a priority, Bellini said. The CEO made the case two weeks ago in his opening speech to analysts, noting that he is a significant shareholder.
``I deeply care about the long-term financial performance, stock price and dividend returns on our stock,'' Ballmer said.
Bellini, based in New York, said she suggested to Ballmer that he announce a tender offer. He resists the idea because he views the company's $20 billion bid in 2006 as a failure. Investors were only willing to part with $3.8 billion worth of shares at $24.75 each.
``So should I do a tender at $28 and get back no shares?'' Ballmer asked rhetorically in a hallway encounter with the analyst, she said.
Reverse Effect
The 2006 tender had the effect of proving that Microsoft was worth more than the market price, and a new offer would do the same, according to Bellini. The stock gained 15 percent in the two months after the company announced that its repurchase was undersubscribed.
Microsoft bought back $27.1 billion worth of shares in fiscal 2007 and $19.7 billion the year before.
Loews's Beyrich agrees with Bellini that $15 billion to $20 billion in spending this quarter is possible.
``They are buying back stock, and they are going to buy back a lot more stock,'' he said.
To contact the reporters on this story: Dina Bass in Seattle at dbass2@bloomberg.net
