MKM Partners weighed in on Microsoft Corporation (NASDAQ:MSFT) ahead of its third-quarter earnings scheduled October 20. The firm believes results will be better than the Street’s expectations led by the More Personal Computing segment and better PC’s and Surface devices sales. This should significantly offset further weakness in Microsoft phones. The firm has reiterated a Neutral rating on the stock along with a $52 price target on the stock, reflecting 8.64% over the previous close of $56.92.
“Better PC's could also aid sales of Office on-premise in Productivity & Business Processes (P&BP), although the comparison here is difficult. In Intelligent Cloud (IC), we expect results to be in line - Azure continues to ramp, but MSFT faces a tougher compare in Server Products which may limit upside,” said Kevin Buttigieg, Managing Director at MKM Partners.
He believes the first quarter of fiscal 2017 will be a cross between the transactional underperformance in 3QFY16 and its outperformance in 4QFY16, while the improvement in cloud profitability/mix continues toward EPS/margins in FY18. Mr. Buttigieg is favorably inclined toward this EPS improvement but tempering his enthusiasm given 18x FY18E EPS P/E valuation and distance in time.
He further noted that the consensus expectation of $0.69 EPS on $21.7 billion revenue is just above the company’s guidance midpoint of $0.66 EPS on $21.6 billion revenue. According to Mr. Buttigieg, better sales of operating expenditure discipline, higher margin PC’s, and continuing improvement in cloud margins could drive upside to EPS. Still, he expects 2QFY17 guidance for gross margins to be down year-on-year, consistent with consensus.
“While Phone revenues are apt to be down significantly again, Lumia phone sales are nearly zero, and performance here could be offset by Surface devices, which face a much easier compare,” said Mr. Buttigieg. MKM Partners has estimated $0.69 EPS on $21.66 billion revenue for the first quarter of fiscal 2017.