valuation report microsoft corp (msft)
TRANSCRIPT
®
Page 1
9.0% 0.82
Return on Invested Capital (ROIC)
$2.48
$2.36
Our Risk/Reward Rating system identifies disconnects between the market's expectations for future cash flows and current cash flows.
13% 1.6
Growth Appreciation Period (yrs)
11/15/2010
ValuationQuality of EarningsOverall Risk/Reward
Rating
Figure 1 summarizes the five factors that drive our OverallRisk/Reward Rating for MSFT. Each factor offers insights into theprofitability and valuation of MSFT.
This report provides a detailed explanation of each diagnosticcriterion and each rating for MSFT. Appendix 1 offers an explanationof how our Risk/Reward Rating system works.
$0.12
The combination of positive and rising economic EPS with a cheapstock valuation drives a Risk/Reward Rating of Very Attractive forMSFT.
> 50
3 > 10
0 > 3
20 > 50
10 > 20
$1.79
Closing Stock Price as of 11/12/2010: $26.27
61.6%
> 3.5 or -1 > 0
2.4 > 3.5 or < -1
1.6 > 2.4
1.1 > 1.6
0 > 1.1
S&P 500
Important Disclosure Information is contained on the last (two) page(s) of this report. The recipient of this report is directed to read these disclosures.
Russell 1000
20 years
We deliver the whole truth by incorporating critical data from the Financial Footnotes and MD&A that other firms miss.
Economic vs Reported EPS
Actual Values
1.5
Very Attractive Risk/Reward Rating
13%
Rising EP means that economic EPS are positive, the company'sROIC is greater than WACC, and ROIC is rising.
The biggest adjustment that lowers economic EPS and is notcaptured in Reported EPS is Reported Net Assets.
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vs.
vs.
vs.
Source: New Constructs, LLC
Rising EP
Misleading Trend
False Positive
Neutral EP
Positive EP
Microsoft Corp (MSFT)
0.2%
Trust
Performance
More Reports
< 1 year
Top Quintile
2nd Quintile
3rd Quintile
4th Quintile
Bottom Quintile
$0.12
Price-to-EBV Ratio
<-5%
3%<10%
>10%
-5%<-1%
-1%<3%
MSFT has an Overall Risk/Reward Rating of Very Attractive becausethe stock offers much more upside potential than downside risk.
$2.10
FCF Yield
Very Dangerous
Attractive
Very Attractive
Dangerous
Neutral
The value and success of our ratings are unrivaled. Click here for proof.
Figure 1: New Constructs' Risk/Reward Rating
0.1% 23 years
VALUATION REPORT
®
Page 2: Economic vs Reported Earnings
Economic vs Reported Earnings
Economic earnings are almost always meaningfully different than GAAP earnings. We believe economic earnings provide a truer measure of profitability and shareholder value creation than offered by GAAP earnings. Investors should beware investing in companies that report profits meaningfully different than their economic profits.
- Employee Stock Options - Pension Over/Under Funding - Excess Cash - Restructuring charges - Pooling Goodwill - Minority Interests
- Off-Balance-Sheet Financing - LIFO Reserve - Unrealized Gains/Losses - Goodwill Amortization - Unconsolidated Subsidiaries - Capitalized Expenses
11/15/2010
Figure 2 highlights the differences between the reported and economic earnings forMSFT. Rising EP means the company earned a ROIC greater than its WACC during thelast Fiscal Year.
Economic earnings and return on capital metrics are significantly more accurate when as-reported financial statements have been adjusted to reverse accounting distortions. The majority of the data required to reverse accounting distortions is available only in the Notes to the Financial Statements, which we analyze rigorously. Our core competency is gathering and analyzing all relevant financial data (from Financial Statements and the Notes) so that we can deliver earnings analyses that best represent the true profitability of businesses. See Figure 3 for a list of the adjustments we make to a company's reported GAAP profits in order to reverse accounting distortions and arrive at a better measure of a firm's profits.
Why Economic Earnings Matter
During the last Fiscal Year, the biggest driver of the difference between reported andeconomic EPS is Reported Net Assets. See Appendix 2 for a line item by line itemreconciliation of Net Income to Economic Earnings.
Source: New Constructs, LLC
Source: New Constructs, LLC
Microsoft Corp (MSFT)
New Constructs rectifies accounting distortions in GAAP financial statements.
Figure 2: Economic Earnings Per Share vs Reported EPS
VALUATION REPORT
Figure 3: Accounting Issues that Distort GAAP
®
Page 3: Economic vs Reported Earnings
11/15/2010
How We Measure Economic Earnings
The metrics we use to measure the economic performance of companies are Economic Profit Margin and Economic Earnings. The Economic Profit Margin for a company equals its Return on Invested Capital (ROIC) minus its Weighted-Average Cost of Capital (WACC). The Economic Earnings of a company equal its Economic Profit Margin multiplied by its Invested Capital. Economic Earnings per Share equal Economic Earnings divided by Basic Shares Outstanding. ROIC equals Net Operating Profit After Tax (NOPAT) divided by Invested Capital. We believe our measures of economic performance are substantially more accurate than accounting metrics because we make adjustments for all the issues listed in Figure 3. Appendix 3 provides a line item by line item reconciliation of Net Income to Economic Earnings.
Figure 4 compares MSFT's Return on Invested Capital (ROIC) to its Weighted-AverageCost of Capital (WACC). This company's ROIC during its last fiscal year ranks in the TopQuintile.
Source: New Constructs, LLC
Microsoft Corp (MSFT)
Figure 4: Return on Invested Capital vs Weighted Average Cost of Capital
VALUATION REPORT
®
Page 4: Free Cash Flow Yield
Figure 5: Free Cash Flow Yield
11/15/2010
Free Cash Flow Yield
Figure 5 shows MSFT's FCF Yield over the past several years. MSFT's current FCFYield is 9.0%.
Free Cash Flow Yield equals unlevered FCF divided by enterprise value. The level ofFCF does not always reflect the health of a business or its prospects. For example, alarge amount of FCF can be a sign that a company has limited investment opportunitiesand, hence, limited growth prospects. On the other hand, negative FCF can be anattractive indication that a company has more investment opportunities than it can fundwith cash from operations. Zero FCF could mean that the company generates justenough cash to internally fund its growth opportunities.
Rigorous back-testing shows that stocks with a Free Cash Flow Yield of at least 10% significantly out-performed both the S&P 500 and a survivor-bias-adjusted index. For more detail on Free Cash Flow Yield and our backtesting, see our report "Cash Is King," which was published November 30th, 2004. Using Free-Cash-Flow Yields to pick stocks is not a new strategy. However, our strategy yields superior results because we use a better measure of Free Cash Flow (FCF), in our opinion. In the same way our economic EPS are better measures of profitability than reported EPS, our measure of FCF is better than traditional accounting-based FCF. We measure Free Cash Flow by subtracting the change in Invested Capital from NOPAT.
Microsoft Corp (MSFT)
Source: New Constructs, LLC. Note: Dot on the line(s) in the chart marks the current value(s).
VALUATION REPORT
®
Page 5: Price-to-EBV Per Share
11/15/2010
Price-to-EBV Per Share
Figure 6: Economic Book Value Per Share vs Market Price
Figure 6 shows the differences between the stock market price and Economic BookValue (EBV) per share of MSFT. These differences reflect the portion of the stock pricethat is entirely dependent on future cash flow growth.
When stock prices are much higher than EBVs, the market predicts the economicprofitability (as distinct from accounting profitability) of the company will meaningfullyincrease. When stock prices are much lower than EBVs, the market predicts theeconomic profitability of the company will meaningfully decrease. If the stock price equalsthe EBV, the market predicts the company's economic profitability will not change.
Microsoft Corp (MSFT)
EBV measures the no-growth value of the company based on the current economic cash flows generated by the business. It is also known as the "pre-strategy value" of the company because it ignores the value attributable to future cash flows, which are, in theory, what business strategies should aim to improve. The Formula for EBV is: (NOPAT / WACC) + Excess Cash + Unconsolidated Subsidiary Assets + Net Assets from Discontinued Operations - Debt (incl. Operating Leases) - Value of Outstanding Stock Options - Preferred Capital - Minority Interests. EBV per share equals EBV divided by shares outstanding.
The lower the stock price is versus EBV, the lower the potential risk of investing in the stock. The higher the stock price is versus EBV, the greater the potential risk of investing in the stock.
Source: New Constructs, LLC. Note: Dot on the line(s) in the chart marks the current value(s).
VALUATION REPORT
®
Page 6: Qualifying Market Expectations
GAP measures the number of years implied by the stock price over which the companymust maintain an edge over its current and future competitors. Specifically, GAPmeasures the number of years a company will earn returns on invested capital greaterthan its cost of capital on new investments. The law of competition dictates that acompany can only grow its economic profits for the finite period over which it canmaintain a competitive advantage.
Historically, MSFT has generated a Revenue CAGR of 9.0%, 1.7%, and 6.9% andEconomic Profit Margins of 67.6%, 55.7%, and 54.1% over the past 5, 3 and 1 year(s).
Furture Performance
$26.27
The Market-implied GAP of the S&P 500 is 20 years. For the Russell 1000, it is 23years. MSFT has a GAP of < 1 year, which is much less than the indices. Based onthis criterion, MSFT has a much greater chance of seeing price appreciationversus the indices.
Our Overall Rating is Very Attractive. Other criteria (per pages above) in our ratingsystem also indicate MSFT is an Attractive investment.
$23.30
11/15/2010
We believe this stock has a Very Attractive Risk/Reward Rating because there is arelatively small difference between the expected financial performance implied by itsmarket price and the company's historical performance.
Historical Performance
The market does not expect MSFT to achieve any future profit growth. See the Price-to-EBV Per Share analysis for more detail.
Performance Hurdles
1.7%
$27.51
1. Revenue CAGR
67.6%
$23.01
6.9%
based on current price
3. Growth Appreciation Period
Quantifying Market Expectations
GAP analysis comes from our dynamic discounted cash flow model, a multi-stage DCF model that values companies across multiple forecast horizons. Each forecast horizon (i.e., Growth AppreciationPeriod - GAP), assumes the company cannot grow profits beyond the GAP period. Our model exclusively uses no-growth terminal value assumptions for calculating the value of the stock for each GAP. The forecast drivers for our DCF model are: (1) Revenue Growth; (2) NOPBT Margin, (i.e. EBIT Margin with Adjustments*), (3) Cash Tax Rate, (4) Incremental Net Working and Fixed Capital needs. See Appendix 8 for the forecasts that drive our DCF model for this company.
Figure 7 compares the future performance required to justify the company's stock marketprice to its historical performance. Specifically, Figure 7 shows: the current stock price of$26.27 implies that MSFT will not generate any growth in economic earnings.
54.1%
Stock Price
Microsoft Corp (MSFT)
Default
< 1 year
-
-
Stock prices reflect the market’s expectations for the present value of future cash promised to the owner.
Comparing the required future performance to historical performance positions investors to asses the feasibility of market expectations and valuations.
See Appendix 8 for the specific estimates used in this company's valuation model.
Appendix 2 details each Adjustment made to this company's reported financial results.
9.0%
2. Avg Economic Profit Margin
Figure 7: Future Performance Required to Justify Valuation
Source: New Constructs, LLC Note: The Default Scenario is Based on the forecast set by the New Constructs analytical team, this scenario represents a likely financial performance path the company may follow to justify the current market price. Subscribers to our services may create alternate forecast scenarios based on their own estimates.
Last FY5 Yr
55.7%
3Yr
- --
VALUATION REPORT
®
Page 7: Qualifying Market Expectations
The Return On Invested Capital minus the weighted-average cost of capital.
Number of years the company can earn a positive Economic Profit Margin on incremental investments, i.e. the number of years it can create economic value.
11/15/2010
3. Growth Appreciation Period
2. "How profitable will the company be?"
Compounded over the indicated time frame.
2. Economic Profit Margin
An alternative way to conceptualize the three value drivers is:
1. "How fast will the company grow?"
3. "For how many years will the company grow economic profits or create incremental value?"
Our Company Models value stocks based on the present value of expected free cash flows, with that free cash flow measured according to our economic (as distinct from conventional accounting) methodology. Website subscribers forecast economic free cash flow by assigning estimates to three value drivers:
Microsoft Corp (MSFT)
1. Revenue Growth
VALUATION REPORT
®
Page 8: New Constructs' Risk/Reward Rating
All criteria are equal-weighted in the average calculation except 2yr FCF Yield is excluded.
-1% < 3%
2nd Quintile
Ranks stocks based on their Market-Implied Growth Appreciation Period. Values based on Latest Closing Stock price and Default Forecast Scenario.
Overall Risk/Reward Rating
Neutral EP
Ranks stocks based on their Free Cash Flow Yield. Values based on Latest Closing Stock price and Latest Fiscal Year.
Very Dangerous = negative and declining Economic Earnings despite positive and rising Reported Earnings
Very Dangerous = in the bottom 20% of all companies
Attractive = in the top 40% of all companies
Top Quintile
Attractive = Economic Earnings are positive
11/15/2010
Return on Invested Capital (ROIC)
All criteria are equal-weighted in the average calculation except 2yr FCF Yield is excluded.
Very Attractive = greater than or equal to 0 years but less than 3
Very Dangerous = greater than or equal to 3.5 or less than 0 but greater than -1
All criteria are equal-weighted in the average calculation.
Very Attractive = Economic Earnings are positive and rising
> 10%
Growth Appreciation Period (yrs)
Ranks stocks based on their ROIC. Values based on Latest Fiscal Year.
10 > 20
Attractive = greater than or equal to 3 years but less than 10
3rd Quintile
The Overall Risk/Reward Rating provides a final rating based on the equal-weighted average rating of each criterion.
FCF Yield
Our Risk/Reward Rating (Figure 1) system grades every stock under our coverage according to what we believe are the 5 most important criteria for assessing the risk versus reward of a stock. Each grade reflects the balance of potential risk and reward of buying that stock. Our Risk/Reward analysis results in the 5 ratings described below. Most Attractive corresponds to a "Buy" rating, Most Dangerous corresponds to a "Sell" rating, and everything in-between corresponds to a "Hold" rating.
Ranks stocks based on their Price-to-Economic Book Value Ratio. Values based on Latest Closing Stock price and Latest Fiscal Year.
Attractive = greater than or equal to 1.1 but less than 1.6
-5% < -1%
Ranks stocks based on how their Economic Earnings compare their Reported Earnings. Values based on Latest Fiscal Year.
3% < 10%
Economic vs Reported EPS
0 > 1.1
Attractive = more than +3% but less than or equal to +10%
3 > 10
Neutral = greater than or equal to 1.6 but less than 2.4
Very Dangerous = less than or equal to -5%
Attractive
> 3.5 or -1 > 0
Misleading Trend
Very Dangerous = greater than or equal to 50 years
< -5%
2.4 > 3.5 or < -1
All criteria are equal-weighted in the average calculation.
Rising EP
Positive EP
Neutral
Dangerous = in the bottom 40% of all companies
Dangerous = greater than or equal to 20 years but less than 50
0 > 3
Very Attractive = more than +10%
Microsoft Corp (MSFT)
Neutral = Negative Economic and Reported Earnings
Price-to-EBV Ratio
1.6 > 2.4
Very Attractive
Very Dangerous
Neutral = in the middle 20% of all companies
1.1 > 1.6
All criteria are equal-weighted in the average calculation.
Dangerous = greater than or equal to 2.4 but less than 3.5 and less than or equal to -1
False Positive
Neutral = more than -1% but less than or equal to +3%
Dangerous = same as above except Reported EPS are not positive or are not rising
> 50
Very Attractive = in the top 20% of all companies
Dangerous = more than -5% but less than or equal to -1%
Bottom Quintile
4th Quintile
Neutral = greater than or equal to 10 years but less than 20
VALUATION REPORT
20 > 50
Dangerous
Appendix 1: Explanation of New Constructs' Stock Ratings Scale
Very Attractive = greater than or equal to 0 but less than 1.1
®
Page 9: Economic Adjustments Summary
After-tax Charge
Unconsolidated Subsidiary Assets (non-operating)
Appendix 2: Economic Adjustments Summary
($0.00)
$0.00$0.00 $0.00
$49.03
$0.00
$0.00
$11,587.11
$2,152.39
Invested Capital
$0.00
$1,939.10
11/15/2010
($42,507.36)
$14,560.80
Off-Balance-Sheet Operating Leases
($0.00)
($43,292.32)
$0.00
$18,760.00
$0.00
Total Reserves
($0.00)
($0.00)$800.79
$39,417.00
($1,577.00)
$50.40
($0.00)
Cumulative Asset Write-Offs After Tax
After-tax Income
$0.00
$17,681.00
$23,006.75
ESO Expense (Employee Stock Options)
Accumulated Unrecorded Goodwill$1,712.15
$14,569.00
$0.00
$78.00($1,790.00)
$0.00
$44.14
$0.00
$56.53
$0.00
$29,206.14($969.00)
$28.62
$0.00
($0.00)
$8,342.24
$0.00
$1,194.22
$872.00
$0.00
Net Non-Operating Expense
2009
($0.00)
20102007 20082006
($0.00)
Non-Operating Taxes
$7,731.82
$0.00
$28,455.30
($856.00)$14,065.00
$0.00
$13,046.91($0.00)
($1,654.00)$9,629.17 $9,820.31
Accumulated Goodwill Amortization
$47,155.00
Net Assets from Discontinued Operations
$514.78
$0.00
($0.00)
Excess Cash
$8,109.14($1,229.00)
Reported Net Assets
$0.00
$0.00
$0.00
Values in millions except per share amounts
Implied Interest for PV of Operating Leases
$0.00
($0.00)
$0.00
Goodwill Amortization$0.00
($0.00)
Deferred Tax Liability$0.00
($1,140.00)
($316.74)
($0.00)
$18,003.43
($0.00)
$0.00
$12,599.00
($0.00)
$60,737.00
$0.00
Accumulated OCI (Other Comprehensive Income)
($0.00)
$0.00
Microsoft Corp (MSFT)
($35,211.26)
($0.00)
$0.00$0.00
($32,505.56)
$15,180.80
$229.00
$0.00
Invested Capital Adjustments - Impact Analysis
$749.49$0.00
($587.97)
$42,907.00
NOPAT (Net Operating Profit After Tax)
$64.73
$0.00
($0.00)
NOPAT Adjustments - Impact Analysis
Change in Total Reserves
$11,951.25
($0.00)
($0.00)
$52,854.00
GAAP Net Income
($29,041.60)
($0.00)
$17,235.76
VALUATION REPORT
®
(0.0%)
(0.0)
49.0
After-tax Charge
(0.0)
(93.9)
Economic Earnings per Share
(1.2%)
($0.00)0.0% 0.0%
(0.0%)
(0.0)
(0.0)(0.0%)
0.0
0.0%
Economic Earnings
(1,577.0)
5.2%
0.0%
$0.00
(4,558.7)
(0.3%)
Deferred Tax Liability Capital Charge
$11,587.11
0.0
(856.0)
Invested Capital
(0.1%)
(1.2%)
(3,324.3)
(0.0%)
0.0
0.1%
11/15/2010
(6.7%)
44.1
(4.0%)
0.0%
$14,560.80
(0.0)
0.0
(0.0)
$0.00
$18,760.00
$1.66
0.0%
(0.5%)
0.3%
(606.3)
$2,123.13
(3,100.5)
(0.0%)
(718.5)
(5.5%)
(0.0%)
$1.63
$1.02
(0.0%)
(316.7)
0.0%After-tax Income
$17,681.00
Capital Charge for Unconsolidated Subsidiary Assets (non-operating)
$23,006.75
130.1
ESO Expense (Employee Stock Options)
0.0
(0.0)
0.0%
(0.0)
0.0
$1,782.50
0.1%
(0.0%)
(0.0%)
$14,569.00
0.0%
(1.4%)
$0.00
NOPAT = Net Income with Adjustments as per below
$937.12
$29,206.14
(0.0)
0.0%($0.00)
(0.0%)
(0.0%)
0.0%
Net Non-Operating Expense
15,811.3
2009 20102007 20082006
As a % of Revenue
As a % of Revenue
As a % of Revenue
As a % of Revenue
As a % of Revenue
As a % of Revenue
As a % of Revenue
As a % of Revenue
As a % of Revenue
As a % of Revenue
As a % of Revenue
As a % of Revenue
As a % of Revenue
As a % of Revenue
As a % of Revenue
As a % of Revenue
As a % of Revenue
As a % of Revenue
As a % of Revenue
0.0%
(0.0%)
WACC * Invested Capital is the charge for capital deducted from NOPAT
Non-Operating Taxes
$0.00
Asset Write-Offs After Tax Capital Charge
(0.0)
(0.0)
Capital Charge for Net Assets from Discontinued Operations
$28,455.30
4.5%
(0.0%)
(3.1%)
$14,065.00
$13,046.91
514.8
(0.0)
Invested Capital * WACC
($0.00)
(0.0%)
(0.2%)
3,249.4(8.3%)
0.1%
(1,790.0)
(0.0%) (0.0%)
13,057.7
0.0
(0.0)
(1.0%)
0.0
2,250.1
88.3
(62.8)
$2,192.11
(1.4%)
0.1%
0.0%
Accumulated OCI Capital Charge
Values in millions except per share amounts
(0.2%)
$1.21
11,901.6
Implied Interest for PV of Operating Leases
0.0%(0.0)0.0%
0.0%
(6.1%)
Goodwill Amortization
3.7%
(0.0)
5.0%
872.0
(0.0)
(0.0)
1.0%
(3,943.6)
0.1%
(0.0%)
10,650.0
Page 10: Reconciling Net Income to Economic Earnings
(160.6)
$1.22
(0.0)
64.7
0.0%
(588.0)
0.0
Total Reserves Capital Charge (0.0)
1.5%
$18,003.43
$2.13
(0.0)
(0.0)
0.0
2,556.9
(0.0%)
(0.0%)
0.0%
$1.79
$12,599.00
(0.0%)
($0.00)
0.1%
17.2
56.5
($0.00)
(0.0)
0.1%
(0.0%)
Microsoft Corp (MSFT)
Capital Charge for Reported Net Assets
0.0%
(0.0%)
Off-Balance-Sheet Operating Leases Capital Charge
$1.44
0.0%
(7.3%)
0.0
0.0
0.0
$1,145.34
1.7%
(0.0)
(0.0%)
$1.90
50.4
$15,180.80
0.0%
(150.2)
0.0%
Basic EPS
Capital Charge for Excess Cash
(0.0%)
0.2%
(128.5)
$0.00
(0.0%)
749.5
(0.0)
(0.0%)
(0.0)
$1.46
NOPAT (Net Operating Profit After Tax)
96.4
3,333.1
(3,697.5)
(0.0)
(1.2%)
0.1%
0.0%
7.5%
Accumulated Goodwill Amortization Capital Charge
(637.9)
(0.0)
(0.0)
(0.0)
(0.0%)
0.0%
Appendix 3: Reconciling Net Income to Economic Earnings
(737.1)
78.0
Economic Earnings = NOPAT minus Capital Charge
(0.0)
0.0
(0.0%)
0.1%
Change in Total Reserves
(0.0%)
0.0
$11,951.25
0.0%
2,627.2
Unrecorded Goodwill Capital Charge
GAAP Net Income
72.3(1.1%)
$17,235.76
(0.0%)
VALUATION REPORT
(646.3)
(0.2%)
Capital Charge = WACC * Invested Capital as detailed below
0.0%
15,453.3
28.6
®
0.0
0.0
0.0
0.0
0.00.0
0.0
0.0
0.0
Other Compensation
Occupancy and Equipment
$62,484.00
0.0
0.0
0.0
0.0
$38,327.00
0.0
$60,420.00
0.0
0.0
Other Income
0.0
0.0Other Cost of Revenue
Net Sales Revenue
Total Operating Expense
$10,693.00
0.0
11/15/2010
0.0
0.0
Licensing Revenue
Other Revenue
0.0
0.0
0.0
0.0
Non-Income Taxes
0.0
0.0
$0.00 $0.00
0.0
Net Interest Income
0.0
0.0
9,818.0
Property Operating Expense
$36,632.00
0.0
0.0
0.0
0.0
Goodwill Amortization0.0
0.0
0.0
0.0
$44,282.00
Gain on Sale (operating revenue)
0.0
13,039.0
0.0
Service Revenue
8,714.0
0.0
0.0
12,879.0
0.0
$12,155.00$48,822.00
Loss on Sale (operating)
0.0
79.1%
Research and Development Expense
$0.00
0.0
0.0
0.0
Gross Margin
$0.00
0.0
Total Operating Revenue
0.0
0.0
0.0
$58,437.00$51,122.00
0.0
2009 20102007 20082006
0.0
0.0
79.2%
0.0
0.00.0
Sales and Marketing
0.0
80.8%
11,455.0
Cost of Licensing Revenue
0.0
80.2%
0.0
0.0
0.00.0
Gross Profit
0.0
0.0
Losses from Discontinued Operations (operating)
0.0
0.0
Fee Income
Gain on Sale of Discontinued Operations (operating)
0.0
0.0
$32,598.00
0.0
0.0
Income from Unconsolidated Subsidiaries (operating)
$3,758.00
0.0
Operating Revenue
0.0
Stock Compensation
0.0
0.0
0.0
0.0
0.0
Energy Operating Expense
9,010.0
0.0
Energy Depreciation, Depletion, and Amortization
0.0
$62,484.00
$3,700.00
0.0
0.0
0.0
0.0
0.0
0.0
0.0
$5,127.00
Interest Expense (operating)
Values in millions except per share amounts
0.0
$12,395.00
0.0
0.0
0.0
0.0
0.0
Other Operating Expense
$60,420.00
$0.00
0.0
$27,810.00
Page: 11 NOPAT (Net Operating Profit After Tax)
Total Cost of Sales
0.0
$7,650.00
0.0
0.0
0.0
$0.00
0.0
0.0
$12,155.00
0.0
0.0
0.0
$4,004.00
$37,928.00
Operating Other Real Estate Owned Expense
0.0
0.0
Operating Expenses and Adjustments
0.0
General and Administrative
0.0
Appendix 4: Net Operating Profit After Tax (NOPAT) - Operating Approach
0.0
0.0
$0.00
0.0
0.0
Microsoft Corp (MSFT)
0.0
0.0
0.0
Operating Income
$3,329.00
Credit Loss Provision
Income from Discontinued Operations (operating)
0.0
0.0
0.0
0.0
Total Operating Income
Cost of Sales
0.0
0.0
0.0
$10,693.00
0.0
Losses from Unconsolidated Subsidiaries (operating)
0.0
$51,122.00
$0.00
0.0
Revenue from Company-Owned Life Insurance
0.0
0.0
0.00.0
6,584.0
0.0
$7,650.00
0.0
Depreciation and Amortization
0.0
0.0
$0.00
$40,429.00
Insurance Expense
$58,437.00
8,164.0
$11,598.00
0.0
$50,089.00
0.0
0.0
Cost of Service Revenue
0.0
0.0
0.0
0.0
$44,282.00
0.0
$46,282.00
0.0
0.0
0.0
Commission Income
0.00.0
0.0
Gain on Sale (operating income)
0.0
7,121.0
0.0
0.0
0.0
0.0
0.0
0.0
Income from Unconsolidated Subsidiaries After-tax (operating)
0.0
0.0
0.0
$0.00
0.0
$11,598.00
0.0
0.0
0.0
$37,744.00
VALUATION REPORT
13,214.0
0.0
0.0
0.0
0.0
$12,395.00
82.7%
0.0
®
(0.0)
49.0Capitalized Items Net Adjustment
28.1%
Non-operating Expenses Included in Total Operating Expenses(0.0)
(0.0)
0.0
0.0%
$24,157.00
$27,810.00
$5,568.74
0.0%
$11,587.11
$38,327.00
11/15/2010
0.0%
44.1
$24,157.00
0.0
(0.0)
36.3%
$28.62
(0.0)
25.6%
$37,744.000.0%
ESO Expense (Employee Stock Options)
0.0
0.0
Cash Tax Rate 29.8%
$24,206.03
$24,206.03
$16,500.62
$16,500.62
$56.53
2009 20102007 20082006
$32,598.00ESO Expense as a % of Revenue
$13,046.91
Taxes and Adjustments
Adjusted Total Operating Expenses
$18,568.14
$18,568.14
$23,892.00
(1,400.0)
$18,524.00
0.0
29.7%
$20,693.00
35.5%
$16,472.00
$4,913.51
Implied Interest for PV of Operating Leases
(0.0)
Goodwill Amortization
$49.03
26.8%
(0.0)
$6,202.60
Page: 12 NOPAT (Net Operating Profit After Tax)
64.70.0
NOPBT Margin
$18,003.43
Cash Operating Taxes
38.7%
0.0
39.7%
56.5
EBIT
Microsoft Corp (MSFT)
$64.73
$23,956.73
$23,956.73
$36,528.00
0.0EBITA
$20,749.53
$20,749.53
$15,180.80
$16,472.00
(0.0) (0.0)
$44.14
(0.0)
(0.0)
NOPAT (Net Operating Profit After Tax)
$20,693.00
(0.0)
(0.0)
$6,720.97
37.3%NOPBT (Net Operating Profit Before Tax)
NOPBT (Net Operating Profit Before Tax)
$5,521.22
0.0
Change in Total Reserves$23,892.00
0.0$18,524.00
$17,235.76
(0.0)
0.0%
VALUATION REPORT
Asset Write-Offs Included in Total Operating Expenses
Net Operating Profit After-Tax (NOPAT) - Operating Approach (continued)
28.6
®
29,041.6
0.0
0.0
0.0
2.0%
0.0
Loans Held for Sale
0.0
0.0
$44,542.00
2,989.0
0.0
Loan Loss Reserves 0.0
Other Receivables
0.0
0.0
Restricted Cash
11/15/2010
985.0
$20,788.40
0.0
0.0
Allowance for Doubtful Accounts
0.0
2,950.0
0.0
$0.00
0.0
0.0
$43,393.00
Held to Maturity Securities (operating)
0.0
0.0
Separate Accounts
0.0
$0.00
$15,734.64
0.0
25,371.0
0.0
13,014.0
885.6
Required Cash as % of Revenue
LIFO Reserves
1,899.0
0.0
0.0
2.0%
0.0
$6,111.00
0.0
4,933.0
0.0
0.0
0.0
0.0
0.0
0.0
Short-Term Investments (non-operating)
$0.00
0.0
2009 20102007 20082006
Total Cash and Investments
0.0
Appendix 5: Invested Capital - Operating Approach
0.0
0.0
0.0
0.0
Other Investment Securities (operating)
$17,779.44
0.0
$0.00
$6,714.00
0.0
Inventory Reserves
0.0
9,232.0
2,213.0
Company Owned Life Insurance (non-operating)
0.0
0.0
0.0
$5,505.00
Current Deferred Costs
2,115.0
0.0
0.0
740.0
$36,380.00
$19,001.74
10,117.0
0.0
0.0
$33,528.00
Excess Cash
7,754.0
0.0
0.0
Values in millions except per share amounts
0.0
0.0
0.0
1,168.7
Accounts Receivable
0.0
0.0
13,323.0
2.0%
6,588.0
9,316.0
0.0
Page 13: Invested Capital
2,017.0
0.0
0.0
0.0 0.0
2.0%
Current Assets / Investment Assets
0.0
Federal Funds Sold and Securities Purchased for Resale
35,211.3
Other Current or Investment Assets
1,249.7
Long-Term Investments (non-operating)
Interest-Bearing Deposits
3,711.0
0.0
0.0
0.0
$10,339.00
0.0
Microsoft Corp (MSFT)
13,589.0
43,292.3
Net Loans
0.0
0.0
0.0
31,283.0
0.0
0.0
0.0
0.0
$20,137.68
0.0
0.0
0.0
$30,250.00
Inventory
32,505.6
$0.00
0.0
2,393.0
0.0
Available for Sale Securities (operating)
717.0
0.0
11,338.0
1,022.4
1,127.0
Cash and Equivalents (non-operating)
42,507.4
0.0
Required Cash
0.0
$6,076.00
27,447.0
2,184.0
Prepaid Expenses
1,478.0
Total Current Assets (adjusted)
1,940.0
2.0%
0.0
1,208.4
0.0
0.0
0.0
Trading Securities (operating)
0.0
0.0
Current Deferred Taxes
VALUATION REPORT
0.0
0.0
11,192.0
0.0
Cash and Equivalents (operating)
0.0
0.0
17,300.0
®
1,509.0
0.0
Income Taxes Payable
Net Working Capital
1,938.0
$34,487.56
0.0
$7,535.00
1,691.0
($6,032.26)
0.0
0.0
0.0
0.0
0.0
Accrued Interest
0.0
Invested Capital
0.0
$34,215.46
0.0
0.0
0.0
Unconsolidated Subsidiary Assets (operating)
11/15/2010
9,629.2
$25,034.00
Federal Funds Purchased and Securities Loaned for Repurchase
$14,560.80
0.0
$23,754.00
Off-Balance-Sheet Operating Leases
0.0
0.0
(1,229.0)
0.0
$4,025.00
1,295.0
3,113.0
$18,658.61
0.0
0.0
Net Other Intangibles
0.0
2,325.0
Net Goodwill
0.0
Accrued Expenses
0.0
Current Liabilities / Investment Liabilities
$22,442.00
0.0
12,503.0
1,973.0
12,108.0
0.0
0.0
800.8
Cumulative Asset Write-Offs After Tax
10,779.0
0.0
0.0
Other NIBCL or Investment Liabilities
0.0
878.0
$23,006.75
Accumulated Unrecorded Goodwill 0.0
2,611.0
0.0
1,158.0
0.0
0.0
0.0
0.0
$25,147.00
$29,206.14
($6,707.36)
0.0
0.0
$4,034.00
Current Deferred Revenue
4,826.0
0.0
$3,324.00
Investment Liabilities - Debt
3,866.0
$3,044.00
0.0
2009 20102007 20082006
Company Owned Life Insurance (operating)
0.0
0.0
0.0
$28,455.30
1,040.0
0.0
0.0
Federal Home Loan Bank Stock
0.0
Discontinued Operations (operating)
0.0
$3,247.00
$32,104.35
Receivables
0.0 0.0
12,394.0
0.0
Accumulated Goodwill Amortization
1,599.0
6,900.0
3,156.0
1,759.0
0.0
0.0
0.0
0.0
0.0
$7,630.00
539.0
0.0
0.0
(969.0)
0.0
0.0
(1,140.0)
($5,974.56)
4,760.0
($9,097.60)
0.0
13,652.0
0.0
7,731.8
0.0
0.0
PPE (Property, Plant, and Equipment)
0.0
0.0
0.0
9,138.0
(0.0)
0.0
0.0 0.0
1,194.2
1,074.0
(1,654.0)
3,283.0
Page 14: Invested Capital
0.0
0.0
Accrued Restructuring Charges
Accrued Other Taxes
0.0
0.0
Deposits
8,342.2
0.0
0.0
$29,886.00
0.0
0.0
Total Adjusted Fixed Assets
0.0
1,389.0
$4,350.00
0.0 0.0
$20,535.36
0.0
$2,909.00
0.0
0.0
Accrued Compensation
Accumulated OCI (Other Comprehensive Income)
($5,009.32)
Deposits
Other Real Estate Owned
0.0
0.0
0.0
Microsoft Corp (MSFT)
0.0
Deferred Income Taxes
0.0
8,109.1
0.0
279.0
0.0
6,273.0
0.0
Prepaid Expenses
0.0
Invested Capital - Operating Approach (continued)
Separate Accounts
0.0
0.0
Accounts Payable
0.0
0.0
1,939.1
0.0
0.0
NIBCL (Non-Interest-Bearing Current Liabilities)
13,003.0
0.0
Fixed Assets
0.0
0.0
0.0
0.0
6,363.0
1,501.0Other Fixed Assets
13,397.0
949.0
9,820.3
0.0
725.0
Deferred Costs
0.0
0.0
0.0
Restricted Cash
1,712.1
0.0
0.0
$6,242.00
1,557.0
$11,951.25
0.0
0.0
Deferred Tax Assets
0.0
Net Combined Intangibles
VALUATION REPORT
2,934.0
3,248.0
0.0
2,152.4
0.0
®
Preferred Capital
8.50%
28.05%
Adjusted Total Debt
0.848.50%
Cost of Preferred Capital
0.0
$243,205.4099.59%
11/15/2010
0.50%
Weighted Cost of Equity Capital
0.33%
7.48%
Cost of Debt Capital
Equity Per Total Adjusted Capital
7.87%
25.62%
3.69%
2.86%
0.03%
0.0
7.83%
0.84 0.84
0.00%
$287,096.747.78%
0.84 0.84
0.75%0.09%
4.59%
4.59%
0.84
Cash Tax Rate
7,651.1
Cost of Equity
29.78%
$0.00
0.00%0.00%7.75%
2009 20102007 20082006
8.50%
0.0
7.86%
4.14%
4.14%
3.26%
4.76%
4.76%
$199,450.68
7.40%
8.50%
0.01%
7.72%
Expected Market Return
0.09%
3.91%
7.85%
7.64%
Weighted Cost of Debt After TaxDebt Per Total Adjusted Capital
0.50%
3.57%29.73%
5.21%
0.11%
Debt Spread Adjusted
3.34%
0.0
Values in millions except per share amounts
7.37%
1,939.1
7.88%
7.39%
26.84%0.30%
3.74%
Page 15: WACC (Weighted Average Cost of Capital)
4.36%
0.0
Cost of Debt After Tax
3.55%
3.55%
2.67%
99.25% 96.74%
0.41%
96.31%
Microsoft Corp (MSFT)
Appendix 6: WACC (Weighted Average Cost of Capital)
0.00%
$0.00
7.46%
7.64%
2.63%
Equity Risk Premium
Cost of Equity Capital according to the Capital Asset Pricing Model (CAPM)
7,662.7
0.30%
3.29%
3.29%
0.00%Cost of Preferred Capital
Risk-Free Rate (10-yr Treasury)
Risk-Free Rate (10-yr Treasury)
$0.00 $0.00
3.29%
3.29%0.50%
0.00%
5.21%8.50%
0.30%
$0.00
800.8
96.42%
1,194.2
7.51%
$212,622.65
Current
$256,613.28
4.95%
0.02%
$227,329.21
7,898.4
99.67%
25.62%3.70%
0.0
Market Value of Basic Equity
$0.00Preferred Dividends
3.58%
7.68%
VALUATION REPORT
8.50%
WACC (Weighted Average Cost of Capital)
Beta Adjusted
7.84%
®
$1.62
Stock Price (closing)
2.14
29,041.6
0.82
Preferred Capital
36.8%
Unconsolidated Subsidiary Assets (non-operating)
2,529.0
Components of Economic Book Value
0.0
Economic Earnings per Share
Value of Outstanding ESO After Tax
Adjusted Total Debt
0.0
71.7%
3,100.0
(21.6%)
$4,191.00
20.6%
($3,112.00)
Economic Earnings
$26.27
FCF as a % of Invested Capital
10.95
$23.30
Appendix 7: Key Economic Metrics Summary
Minority Interests
$11,587.11
11.08
$186,949.83
35.6%
0.00.0
$345.00
$1.7030.7%
20.4%
11/15/2010
Unlevered NOPAT Per Share
$230,072.55
28.8%
0.0
(242.7%)
54.1%
$18,760.00
415.0
61.6%
$1.66
1.48
7.48%
45.2%
Price to Unlevered NOPAT per Share
31.4%
7.87%
7.87%
(13.3%)
$0.00
18.8%
45.9%
$194,077.54
0.0
20.99
102.0%
$1.63
$1.02
5.41
$17,681.00
12.50
0.0
$18,001.20
FCF (Free Cash Flow) $12,188.51
22.00
(24.3%)
Economic Book Value (EBV)
$26.58
Economic Profit (EP) and Free Cash Flow (FCF)
ROIC derived from prime components (NOPAT Margins * Invested Capital Turns)
$14,569.00
2.05
15.0%
29.8%
$9,732.2519.7%
14.89
7.75%
7.75%
9.37
Invested Capital Turns
$1,194.22
15,811.3
$0.00
2009
2009
2010
2010
2007
2007
2008
2008
2006
2006
0.00.0
$1.85
701.6
31.2%
$2.04
$27.51
$7,898.39
6.8%
$1.87
20.71
$1.4214.5%
0.0
0.0
28.5%
14.68
0.0
Economic Book Value (EBV) Per Share $17.91
38.2%
38.0%
$14,065.00
3.71
$13,046.91
(11.9%)
$31.85
PEBV (Price to Economic Book Value) per Share
0.0
19.48
NOPAT Margin
Economic Earnings Margin (ROIC - WACC)
0.92
$19.92
(7.4%)
$3,551.69
$0.00
13,057.7
(14.7%)
$23.01
$7,651.15
12.63
Pensions Net Funded Status
Excess Cash
(14.1%)
$0.00
Diluted GAAP EPS
$1,342.03
0.0
Values in millions except per share amounts
1.30
$29.47
$10,437.37
0.0
$1.21
11,901.6
26.2%
0.0
$275,637.16
($2,395.59)
81.7%
6.5%
97.0%
14.01
10,650.0
Page 16: Key Economic Metrics Summary
Unlevered NOPAT Per Share Growth
59.1%
$1.22
Incremental Return on Capital
0.0
0.0
48.7%
89.6%
Return on Invested Capital (ROIC)
35,211.3
Price to Accounting Book Value
Change in Economic Earnings
$18,003.43
$2.13Diluted GAAP EPS Growth
$800.79
22.9%
43,292.3
$2.10
$1.79
16.7%
0.0
Change in ROIC
$12,599.00
$1.11
6.12 4.45
Basic EPS Growth
1,612.7
$0.00
$7,662.72
34.2%
Microsoft Corp (MSFT)
27.6%FCF as a % of Total Revenue
43,292.3
689.4
$1.44
7.46%
7.46%
0.0
172.3%
18.9%
$0.00
Economic Earnings per Share Growth
26.0%
8.3%
20.4%
P/E (Price/Earnings Multiple)
$275,090.73
$1.90
$1.34
32,505.6
$15,180.80
1.03
67.2%
Basic EPS
$1,251.58
31.3%
$247,952.32
$1,466.00
27.5%
0.0
42,507.4
$23.77
$3,616.00$1.46
NOPAT (Net Operating Profit After Tax)
0.73
0.0
7.51%
7.51%
25.5%
40.6%
Current
$31.74
0.0
ROIC (Return On Invested Capital)
$17,252.59
Return on Equity
$25.72
7.18
Net Income Change
$1.20
$2,753.65
19.6%
0.0
Adjusted Net Assets from Discontinued Operations
2.63
17.0%
GAAP Net Income
160.5%
89.1%
53.3%
$8,789.81
$1,939.10
$17,235.76
Economic Book Value (EBV)
(8.2%)
14.73
VALUATION REPORT
74.9%
WACC (Weighted Average Cost of Capital)
WACC (Weighted Average Cost of Capital)
5.08
3.51
7.84%
7.84%
51.8%
15,453.3
®
EY 26
DCF Forecast Drivers
40.0%
7.0%
37.8%37.8% 37.8%
40.0%
9.5%
Net Working Capital Delta as % of Revenue Delta
25.6%
11/15/2010
6.5%
22.5%
Historical
6.0%
25.6%
18.2%
36.3%
29.8%
EY 4
40.0%
(35.9%)
15.4% (3.3%)
124.4%
25.6%
Total Operating Revenue Growth
37.8%
40.0%
2.0%
37.8%
25.6%
2.0%
EY 3
2009 20102007 20082006
25.6%
40.0%40.0%
2.0%
11.3%
37.8%
10.7% 2.0% 2.0%
25.6%26.8%
35.5%
(6.7%)
EY 1
29.7%
25.3%
Values in millions except per share amounts
6.9%
25.6%
EY 51
6.5%6.5%
25.6%
Page 17: DCF Forecast Drivers Summary
(33.6%)
40.0%
(154.6%)
NOPBT Margin6.5%
38.7%
EY 2
39.7%
40.0%
2.0%
Microsoft Corp (MSFT)
25.6%
40.0%
EY 11
27.4%
EY 6
37.8%
(120.2%)
37.8%
Fixed Adjusted Assets Delta as % of Revenue Delta
Appendix 8: DCF Forecast Drivers Summary
6.5%
28.1%
7.1%
2.0%
EY 21
2.0% 2.0%
37.3% 37.8%
2.0%
25.6%
37.8%
VALUATION REPORT
6.5%
Cash Tax Rate
EY 16
40.0%
25.6%
®
11/15/2010
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Incorporated in July 2002, New Constructs is an independent publisher of investment research that provides clients with consulting, advisory and research services. We specialize in quality-of-earnings, forensic accounting and discounted cash flow valuation analyses for all U.S. public companies. We translate accounting data from 10Ks into economic financial statements, i.e. NOPAT, Invested Capital, and WACC, to create economic earnings models, which are necessary to understand the true profitability and valuation of companies. Visit the Free Archive to download samples of our research. New Constructs is a BBB accredited business and a member of the Investorside Research Association.
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New Constructs® - Profile
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The information and opinions presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or solicitation of an offer to buy or sell securities or other financial instruments. New Constructs has not taken any steps to ensure that the securities referred to in this report are suitable for any particular investor and nothing in this report constitutes investment, legal, accounting or tax advice. This report includes general information that does not take into account your individual circumstance, financial situation or needs, nor does it represent a personal recommendation to you. The investments or services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about any such investments or investment services. Information and opinions presented in this report have been obtained or derived from sources believed by New Constructs to be reliable, but New Constructs makes no representation as to their accuracy, authority, usefulness, reliability, timeliness or completeness. New Constructs accepts no liability for loss arising from the use of the information presented in this report, and New Constructs makes no warranty as to results that may be obtained from the information presented in this report. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information and opinions contained in this report reflect a judgment at its original date of publication by New Constructs and are subject to change without notice. New Constructs may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them and New Constructs is under no obligation to insure that such other reports are brought to the attention of any recipient of this report. New Constructs' reports are intended for distribution to its professional and institutional investor customers. Recipients who are not professionals or institutional investor customers of New Constructs should seek the advice of their independent financial advisor prior to making any investment decision or for any necessary explanation of its contents. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would be subject New Constructs to any registration or licensing requirement within such jurisdiction. This report may provide the addresses of websites. Except to the extent to which the report refers to New Constructs own website material, New Constructs has not reviewed the linked site and takes no responsibility for the content therein. Such address or hyperlink (including addresses or hyperlinks to New Constructs own website material) is provided solely for your convenience and the information and content of the linked site do not in any way form part of this report. Accessing such websites or following such hyperlink through this report shall be at your own risk. All material in this report is the property of, and under copyright, of New Constructs. None of the contents, nor any copy of it, may be altered in any way, copied, or distributed or transmitted to any other party without the prior express written consent of New Constructs. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of New Constructs. Copyright New Constructs, LLC 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010. All rights reserved.
New Constructs®, LLC (together with any subsidiaries and/or affiliates, 'New Constructs') is an independent organization with no management ties to the companies it covers. None of the members of New Constructs' management team or the management team of any New Constructs' affiliate holds a seat on the Board of Directors of any of the companies New Constructs covers. New Constructs does not perform any investment or merchant banking functions and does not operate a trading desk. New Constructs' Stock Ownership Policy prevents any of its employees or managers from engaging in Insider Trading and restricts any trading whereby an employee may exploit inside information regarding our stock research. In addition, employees and managers of the company are bound by a code of ethics that restricts them from purchasing or selling a security that they know or should have known was under consideration for inclusion in a New Constructs report nor may they purchase or sell a security for the first 15 days after New Constructs issues a report on that security. New Constructs is affiliated with Novo Capital Management, LLC, the general partner of a hedge fund. At any particular time, New Constructs' research recommendations may not coincide with the hedge fund's holdings. However, in no event will the hedge fund receive any research information or recommendations in advance of the information that New Constructs provides to its other clients.
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