August 10, 2016

Valens Equities Weekly Insights and Inflections for August 10, 2016


Each week the Valens Securities team highlights our most interesting insights from across our tools and analyses, including individual company industry and macro insights.

Expectations for a sustained lower ROA’ for MSFT appear misplaced, considering management’s confidence about their outlook for the cloud and other businesses

MSFT Stock Chart

MSFT is trading at a 21.0x V/E’, at the higher end of historical valuations. However, even at these valuations, market expectations for MSFT remain muted. MSFT saw ROA’ fall below their historical trend in 2016, as the company goes through their cloud and subscription model strategy changes. At current valuations, the market is expecting the transitory dip in ROA’ to be a sustained new normal for the company, with ROA’ never reaching back up to historical trends. However, Valens’ qualitative analysis highlights management’s confidence about their progress in the strategies they are pursuing for the business and their success in their transition. Management is confident about their cloud strategy, demand for their cloud business, and their revenue guidance for cloud remaining robust. They are also confident about their Office 365 strategy, the strength of growth for that business, and their overall Commercial business growth. Considering management’s strong confidence in the business and low market expectations even at current valuations, MSFT appears to have potential for further equity upside.

Market Insights
Most Compelling Long Ideas
FB, ZG, DLTR, DHI, GOOGL
Most Compelling ECF™ Inflections
ABC, AYI, WCN, SCI, AMZN

Company Specific Highlights & Insights:
SWX:ADEN, AVGO, COO, CVX, FDX, GE, GWW, LNN, LUV, MDT, MON, PEP, PH, RCL, ROP, SLB, SRE, SWKS, SWX, TOO, V

Aggregate ECF™ Trend Analysis:
Management confidence levels continue to be volatile, ranging between 24 month highs and 24 month lows in the past 6 months. In April, Management Confidence spiked higher, but the metric subsequently rolled over in May, falling to the low end of its range. This signaling that growth remains elusive, as management teams continue to not be confident enough to invest in their businesses.

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