This Stock is the Oscar Robertson of the Market
Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
What do Microsoft (NASDAQ: MSFT) and Oscar Robertson have in common? First, the NBA legend was known for his versatility and has more triple-doubles -- 181 in his career -- than any other player. (A triple-double is when a player records double-digit totals in three statistical categories, most commonly points, assists, and rebounds.) So you figure that I am implying that Microsoft is a triple-double machine. Well it hasn’t been from a return standpoint, that's for sure; the stock trades at the same level it did thirteen years ago. But from a valuation standpoint, it is the Oscar Robertson of the equity market.
Microsoft is the largest maker of enterprise and consumer software products with more than $60 billion in revenues. The main business divisions are the Office suite, Windows operating systems, Server and Tools, Entertainment (XBOX), and Online Services.
Certainly these categories are subjective, but I think these attributes demonstrate three key ingredients in a stock’s success: company performance, growth, and valuation. If you combine all these together the odds are greatly in your favor.
The most important and often the toughest to calculate correctly is return on invested capital, or ROIC. This number is often calculated differently by various people -- I use Bloomberg. This measure is the most important number regarding operating performance, but often goes unnoticed because of the discrepancies in its calculation. When this number exceeds the company’s weighted average cost of capital then positive economic value is accruing to shareholders. This is a “bonus” return after bond holders get their required return and equity holders get theirs.
Most companies have a WACC around 10% and maybe a little lower given today’s return environment. I set the threshold a bit higher at 20% and Microsoft sailed past with ROIC in the mid-30% range. PERFORMANCE--CHECK.
Growth is the second most important factor. Here I used the five-year compound annual growth rate in dividends -- actual cash to shareholders. The threshold here was again 10% and Microsoft comes in around 12%. GROWTH--CHECK.
Valuation is the final aspect and is the biggest factor to long-term stock returns. The ratio I used here is another under-the-radar one, free cash flow yield. It is essentially the cash available to bond and stock holders. 10% is a very high threshold, especially for a growing company, and Microsoft clears that as well. VALUATION--CHECK
Microsoft is one of only four companies with a market capitalization greater than $10 billion that currently has a triple-double going for them. The other names all look intriguing as possible investment candidates: Lockheed Martin (NYSE: LMT), Western Union (NYSE: WU), and Cliffs Natural Resources (NYSE: CLF), which I recently highlighted here.
Lockheed Martin is the world’s largest defense contractor and has annual sales approaching $50 billion. The company is facing some budget cuts in the coming decade -- yeah, that is well known. You have also probably heard about their F-35 project being on the chopping block, but who hasn’t. This stock is a classic “climb the wall of worry” name that pays a 4.5% GROWING dividend and trades at a valuation multiple that is unlikely to compress much further. Consider it the turtle in the race that just may get to the finish line first.
Western Union is the world’s largest money-transfer company and has annual sales above $5 billion. The bulk of their business is in retail cross-border transfers, but they also have a presence in consumer-to-business transfers and intra-country transfers. The company operates in over 200 countries and more than 400,000 agent locations. WOW! Sales growth is consistent in the mid-single digit area.
Cliffs is the largest producer of iron ore pellets in North America. They also have a presence in metallurgic coal through recent acquisitions. The company used to derive almost 80% of sales from the United States, but some acquisitions and joint ventures in Australia and Brazil have cut that level in half.
Microsoft continues to be at the top of just about every possible screen. I recently highlighted the stock here, and I would back the truck up, if only I had a truck full of cash. Microsoft works for just about every investing style and is nearly impeccable for investors with long time horizons. It clearly is the Oscar Robertson of the market. And rounding out the team are three other viable candidates.
Motley Fool newsletter services recommend Microsoft and Western Union. The Motley Fool owns shares of Lockheed Martin and Microsoft. market8 owns shares in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.