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Microsoft’s future pondered
as earnings season heats upThe software giant's forecast may
provide some clues to the economic
recovery
NEW YORK » Microsoft Corp.'s successes over the last three decades have made it the third-largest company in the stock market and its founder the richest man in the world. But with its peak growth years behind it, investors are wondering what's ahead for the computing powerhouse.
For years, investors have classified Microsoft as a growth stock, and certainly it has been a bellwether for the high-tech sector. But the upstart that helped lead the tech revolution has become more mature, and with its products dominating the software market, its stock price no longer loops upward as it did in the company's youth.
"It seems like their shareholder base is really turning over from a lot of the growth funds to a value base," said John Rudy, an analyst with Standard & Poor's. "The big question is, what is the catalyst to get the shares going?"
Microsoft is among more than 170 companies in the Standard & Poor's 500 reporting quarterly earnings in the coming week. It's expected to post profits Thursday of 29 cents a share and revenues of $8.66 billion, according to analysts surveyed by Thomson First Call.
Results are also expected from such bellwethers as Pfizer Inc., American International Group Inc., Altria Group Inc. and Coca-Cola Co. Though most companies have either matched or beaten Wall Street's expectations so far this earnings season, the market's reaction has been muted. The prospect of higher interest rates has been an unwelcome distraction for investors, who are struggling through a correction that started in February.
Investors searching for further evidence that the economy is improving will be listening closely to forecasts for the rest of the year, including Microsoft's. The company may not make any surprise announcements, but investors are looking to it to find ways to increase its profits since the next version of its Windows operating system isn't due until 2006.
With almost $53 billion in cash and short-term investments, Microsoft could go acquisition hunting, though its wrangling with regulators makes anything beyond a strategic niche purchase unlikely. It also could share more of its wealth with investors, either with a one-time special dividend or by raising its payout on an annual basis.
Now that it has dealt with a series of legal issues in the United States and abroad, the company may be willing to do just that, though probably not next week, Rudy said.
It recently settled patent and antitrust suits with Sun-Microsystems Inc., InterTrust Technologies and AT&T Corp., and last year it put to rest claims by Time Warner Inc. involving Netscape Communications. And most of the uncertainty surrounding its European Union antitrust case was dispelled last month, when EU regulators ruled against it, ordering sanctions and a big fine. Microsoft is appealing the decision.
Even without something to jog the stock in the near future, Microsoft's stock is likely to rise ahead of the much-anticipated launch of the new version of Windows. But that doesn't seem to be inspiring buyers now.
"Everyone believes the stock is stuck in neutral. That really seems to be the expectation, and that's really not the case," said Rudy, noting that the company produced steady growth throughout the recent downturn.
A lethargic stock price -- now at $25.16, Microsoft hasn't traded near $40 since mid-2000 -- and the prospect of a higher dividend make the stock ever more appealing to value managers, such as Carl Peterson, president of Parkway Advisors in Abilene, Texas.
Just before the EU decision, as the market was sinking into its correction, Microsoft's share price fell so far, it landed in a list of out-of-favor stocks Peterson uses to build his firm's value equity portfolio. He ranks the stocks in the S&P 500 based on past performance, then makes value picks from the bottom 125.
The Dow Jones industrials ended the week up 9.94, or 0.1 percent, finishing at 10,451.97. The Standard & Poor's 500 index slipped 4.71, or 0.4 percent, to close at 1,134.61. The Nasdaq tumbled 57.12, or 2.8 percent, during the week, closing yesterday at 1,995.74. The Russell 2000 closed the week down 14.51, or 2.4 percent, at 583.37.
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