Morgan Stanley: Microsoft's Growing Hoard Of Cash Not Reason Enough To Buy Shares

Keith Weiss of Morgan Stanley recently held meetings with Microsoft Corporation's MSFT Investor Relation team.

Weiss left the meetings a positive impression and convinced that there is further room for operating efficiencies within the company. The analyst also believes that Microsoft's leadership has prioritized a better capital allocation program as company investments are more focused on core initiatives.

Microsoft increased its cash and short-term investments by 60 percent over the past three years, bringing its total to $89 billion. However, approximately 90 percent of the cash is located offshore, creating "significant" tax implications for repatriating.

Repatriating cash is technically an option for the company, however the negative tax implications could more than offset any potential benefit from buybacks or dividends, according to Weiss. The analyst does note that repatriating the cash is an "unattractive option" to maximize shareholder value.

Microsoft's other option involves increasing its leverage given its "headroom" in debt capacity within its AAA rating. The analyst estimates that Microsoft could maintain its rating with a small debt increase, while a debt increase of $20 billion will result in a downgrade to Aa.

Under an optimal solution, Microsoft should be able to buyback 505 million shares through calender 2017, resulting in a 7 percent improvement in its earnings per share.

However, the analyst concludes by stating that shares of Microsoft are trading at multiples at five-year highs with a focus "shifting towards sustained execution." As such, the analyst recommends waiting for a better entry point before getting "aggressive" on shares.

Shares are Equal-weight rated with a $51 price target.