Morgan Stanley Upgrades Microsoft To Overweight Ahead Of Q2 Results

• Microsoft Corporation MSFT shares have plunged 4 percent over the last 5 trading days.
• Morgan Stanley’s Keith Weiss upgraded the rating for the company from Equal-weight to Overweight, while raising the price target from $57 to $66.
• The company could continue to generate total return in mid-teens, Weiss stated.

While Microsoft’s EPS growth has been stagnant over the past 5 years, analyst Keith Weiss believes that “the trend line is poised to inflect upwards.”

Weiss said that a dividend yield of about 3 percent, and a projected EPS CAGR of around 10 percent for FY15-FY18 translates to a total return profile of about 13 percent, which is higher than the S&P at about 8 percent. This should boost Microsoft’s shares.

The analyst enumerated the components of Microsoft’s mid-teen return as:

1. Durability of Growth – Weiss believes the company would be able to generate a revenue CAGR of about 7 percent in FY16-FY18, with the drivers being the Azure, Data center and Office 365.
2. Operating Margin Expansion – Weiss expects the company’s margins to improve each year through FY18, backed by continued strong opex controls and gross margin expansion in thecloud businesses, which would offset mix shift.
3. Aggressive Capital Return – Weiss projected 3 percent dividend yield and significant share buybacks, stating that Microsoft had hiked its dividend by an average of 18 percent per year over the past 5 years, “a trend we see sustaining as EPS growth returns.”

“Microsoft has a strong public cloud positioning, datacenter share gains, a durable Office franchise, and less risk in Windows bolsters our confidence,” the Morgan Stanley report noted.