Saturday, September 7, 2013
It's been a volatile few weeks for one of the biggest companies in the world...
On July 17, after the market closed, software giant Microsoft reported earnings... The stock fell more than 11% the next day.
The market was concerned that declining PC sales – and Microsoft's inability to successfully navigate the mobile space – would doom the company. But Dan Ferris, who holds Microsoft in his World Dominator portfolio, was still bullish on the stock.
After all... the company is still producing nearly $30 billion of cash a year. And it has nearly $80 billion of cash on its books. Plus, Dan argued, individuals' waning interest in PCs didn't hurt Microsoft as much as everyone believed. In August, Dan wrote:
Then on August 23, Microsoft CEO Steve Ballmer announced he would step down within 12 months. Ballmer's been lambasted for some poor acquisitions (which we'll discuss later) and failing to compete in the mobile market. The market applauded his departure, sending shares up 7% on the news. But Dan wasn't as down on Ballmer as the rest of the market. In an update to readers, he wrote:
Dan said Ballmer's departure was neither great nor terrible. And Microsoft's intrinsic value didn't increase 7% with his departure (just as it didn't drop 11% following the earnings announcement).
That brings us to this week...
Microsoft announced on September 3 that it would buy Nokia's devices unit for $7.2 billion. Nokia is the struggling Finnish cell-phone company that failed to "break through" into smartphones.
Nokia CEO Stephen Elop will move to Microsoft following the transition and represents a possible successor to Ballmer.
The deal with Microsoft takes Nokia completely out of the handset market. It's left with a pile of cash and NSN – the company's maps and advanced technology division (basically research & development and various patents).
One of my contacts, a senior executive in the technology space, wrote me with his thoughts on Nokia's current situation...
The stock jumped 40% initially on the news...
As for Microsoft, it's clear the software giant is making a big push into smartphones... It's hoping its scale and technology combined with Nokia's mobile know-how will help it compete against the likes of Apple and Samsung. But the market isn't so sure... Microsoft fell nearly 6% on the news.
The market has good reason to question Ballmer's latest acquisition – his potential final black eye for capital misallocation. He hasn't made the best decisions in the past...
In 2007, Microsoft bought digital marketing and service provider aQuantive for $6 billion. Late last year, Microsoft took a $6.2 billion write-down to its Online Services Division. The write-down was related to the goodwill from the aQuantive acquisition.
Acquiring companies carry goodwill on their balance sheet equal to the amount paid above the target company's book value... And Microsoft wrote down the whole lot (and then some).
Microsoft also spent $8.5 billion in October 2011 to buy Internet phone service provider Skype – more than three times what eBay paid for Skype in 2005. (And eBay couldn't make the investment profitable even at the lower price.)
Time will tell how the Nokia acquisition works for Microsoft... But the company has a spotty history of acquisitions. That hasn't stopped it from being an incredible investment, though.
Microsoft is a classic example of the kind of business Dan calls a World Dominator. These rare businesses sell the No. 1 product or service in their field... They have tremendous competitive advantages over their rivals that make it nearly impossible to compete with them... They generate consistent and often thick profit margins and generate tons of free cash flow year after year. And many pay generous and growing dividend streams.
Dan tracks 11 World Dominating Dividend Growers in his 12% Letter portfolio. We've mentioned many of these businesses in the past – names like consumer-products giant Johnson & Johnson and retail colossus Wal-Mart.
Simply buying and holding these companies in your portfolio is one of the surest and safest ways to make money in the market.
Naturally, when Porter writes about "capital efficient" companies, his analysis often leads him to the exact same universe of World Dominators. In the August 26 Digest Premium, Porter noted that many people think these stocks only outperform over the long term, but that's not true...
The key, of course, is buying at the right price. Any investment – no matter how strong the business – will struggle if you pay too much for it.
Most of the time, you don't have the chance to buy stock in well-run and highly regarded businesses for a bargain... But when you do, you should load up. Our Editor in Chief Brian Hunt wrote about World Dominators in the June 6 Digest. As he said at the time...
And right now... Dan says three of his favorite World Dominating Dividend Growers are trading for less than the buy-up-to prices he's set for them.
In deference to Dan's readers, we can't name them here... But we encourage you to learn more about The 12% Letter and gain access to Dan's valuable research on these stocks. To find out more about subscribing to The 12% Letter – and which World Dominating Dividend Growers represent exceptional bargains right now – click here.
Date Range:8/29/2013 to 9/5/2013
Date Range:8/29/2013 to 9/5/2013