Thursday, October 12, 2006

Calls of Note Part 5

- JP Morgan notes that while the September quarter is rarely great for Microsoft (NASDAQ:MSFT), and there may be moving pieces around estimates, this should be more than offset by several positive data points on the upcoming Office and Vista product cycles they
expect to get on the Q1 call and shortly thereafter. Firm looks for an acceleration in EPS growth to over 20% beginning in the March quarter--which should get discounted in the stock over the next few months and they remain buyers of Microsoft.

Based on positive data from the release candidate programs, the firm is increasingly comfortable that Vista will be released on time or very close. As a result, they believe it is likely that MSFT announces technology protection/upgrade rights for the holiday season. Under the program, consumers who purchase PCs with Windows OS in the holiday season prior to the Vista launch would be provided with vouchers/coupons which they can redeem for a Vista upgrade when the new OS is available.

With most people focused on Vista, they believe the Office 2007 product cycle could prove to be the dark horse as there is considerable pent-up demand for the new product and many organizations did not upgrade to Office 2003. Information Worker unearned increased 22% YoY in the second half of FY06--a positive early indicator for Office 2007 and we look for strong IW bookings in Q1. Given bookings strength and pent up demand for the release,
the firm believes Office 2007 could drive upside to their IW targets for CY07.

Should we get positive data on the Vista release and strong Office bookings, it will more than offset the influence of numbers moving around Q1 in firm's view. With the stock trading at 17x CY07 EPS of $1.63 vs. coverage universe at 23x, they expect MSFT stock to be fueled both by multiple expansion as we near accelerating growth in Q3 and believe positive revisions are likely as we get into the back half of the year. Reiterates Overweight rating.

Notablecalls: Not actionable but good to know category

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