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Fundamental and Technical Analysis of Microsoft

By:   •  August 2, 2019  •  Case Study  •  5,561 Words (23 Pages)  •  205 Views

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INDIVIDUAL ASSIGNMENT

Fundamental and Technical Analysis of Microsoft

STUDENT #808014630

     

Damien Gill

INTF 6014 – Portfolio Management


Table of Contents

                                                                                                Page

1.1 Security Analysis …………………………………………………………………………..        1            

1.2 Fundamental Analysis ……………………………………………………………………..        5      

1.3 Technical Analysis …………………………………………………………………………        3      

1.4 Economic Analysis …………………………………………………………………………        4      

1.5 Industry Analysis ……………………………………………………………………………        5      

1.5.1 Overview of Microsoft …………………………………………………………………….        6      

1.5.2 Competitors and Demand ………………………………………………………………..        7      

1.6 Company Analysis – Ratios ………………………………………………………………..        10    

2.1 P/E Ratio Meaning and Calculation ……………………………………………………….        16    

2.2 P/E Comparison to Competition & Sector ………………………………………………..        16        

3. Plotted Share Price – Microsoft & Index …………………………………………………….   18  

4.  Findings …………………………………………………………………………………………        23        

Appendix …………………………………………………………………………………………….        24

Bibliography …………………………………………………………………………………………        30

Write a report on any chosen company (Microsoft) using Techniques of Fundamental and Technical Analysis covering the following:

  1. The company and its prospects from published accounts and any other source of information as may be available (which source must be cited) while instituting the top down approach to analysis including;

A ratio analysis over the latest 3-5 years (explaining the meaning of each ratio), taking into consideration its limitations and its implications for share price discovery.

  1. Security Analysis

For the purpose of this project, we will be utilizing both techniques of Fundamental and Technical Security Analysis. The goal is ultimately to determine a buy, hold or sell recommendation for Microsoft shares as an investment.

According to Reilly and Brown (2012) an investment is defined as “the current commitment of dollars for a period of time to derive future payments that will compensate the investor for (1) time the funds are committed (2) expected rate of inflation during this time period, and (3) the uncertainty of future payments.

Security Analysis involves using different techniques and methodologies to capture the intrinsic value of a stock. This intrinsic value is then compared to the market value to determine whether the securities are over, under or correctly priced in the market.

Reilly and Brown (2012) suggests that there are two (2) main methodologies used to perform security analysis. These include as mentioned earlier the use of Technical and Fundamental analysis.

  1. Fundamental Analysis

This is a type of security analysis involves making investment decisions based on an in depth look at three (3) variables. These are as follows:

  • Economy – utilizing economic indicators such as GDP, Income per capita & determining the state of the economy
  • Industry – identifying the competitors and using peer analysis and benchmarks
  • Company – projecting company performance

In this analysis report, the top down approach will be used. Firstly, the analysis will begin with an examination of the general state of the U.S. economy. Secondly, a look at the industry Microsoft competes in and the firms’ competitors and competitive space. Finally, a look at the company itself, the financial information, brand reputation, strategic placement and long-term vision etc.

  1. Technical Analysis

Technical analysis, according to the Market Technicians Association, is a method of evaluating securities by analysing statistics generated by market activity (Reilly and Brown 2012). It is used as an alternative method to investment decision making.  

Technical analyst believe that past prices and volume movements signal future price movements instead of using in depth analysis on economy, industry and company variables.        

Table 1: Summary of the differences between Fundamental and Technical Analysis

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  1. Economic Analysis

The U.S. economy is one of the largest and most powerful economies in the world. Despite this, the U.S. are facing challenges domestically unlike ever before. The creation of the internet and globalisation has led to this phenomenon.

 Of the total global output, the U.S. economy is said to represent 20% of all GDP, even more so than China. The IMF recently reported GDP per capita statistics to back this statistic up. The U.S. is rated as the sixth highest GDP per capita.

The U.S. economy is tremendously well developed and possesses one of the most technically adept tertiary sectors. Services contributes approximately 80% of all the output within the economy. The most important sectors within the U.S. economy include the following:

  • Technology
  • Retail
  • Financial Services
  • Health Care

Of all the companies that form part of the Fortune 500, more than 20% originate from the U.S. Despite services being accountable for the most of output in the US, manufacturing also plays a key part. They are considered industry leaders in a multitude of sectors including but not limited to automobiles, telecommunication and chemicals. Manufacturing for instance, accounts for 15% of the output for the US with the second largest manufacturing sector globally. Agriculture, on the other hand, accounts for less than 2% of output. Interestingly, the U.S. is still a net exporter of food. Thanks to advancements in farming techniques and government subsidies granted to farmers.

The U.S has managed to continually maintain its status as the worlds’ most dominant economy by making use of the following characteristics. For instance, the U.S. possesses an abundance of natural resources and high-tech infrastructure. In addition, human capital has been fully leveraged with a very well educated and productive workforce.

The government is also relatively stable with a legal and regulatory system that allows the economy to truly perform to its best. The cultures are also diverse and with that comes a strong work ethic and entrepreneurial risk taking. Growth in the United States is continuously driven by factors such as capital investing, R&D and constant innovation.

The U.S economy has only now started to emerge from the disaster and turmoil that began in 2008. Factors such as low interest rates, high levels of debt, sub-prime mortgage lending and risky investments was at the heart of the collapse. The economy would go on until late 2009 and experience the greatest recession since the great depression. Luckily, the government intervened and purchased many of the troubled mortgaged back securities to put some stability back into the economic system. The economic stimulus package included a spend of over USD $831 Billion spent over the next 10 years to 2019 to get the economy back on track.

Recovery has been slow to recover but seems to be pulling out of its worst periods. Implementations such as expansionary monetary policies have allowed governments to increase the money supply while keeping interest rates low – this practice is termed quantitative easing.

The labour market has also seen great recoveries since the financial crisis in 2008. Employment has returned to its former levels but there are still questions surrounding the true health of the U.S. economy. While it is true, that the worst parts of the recession have now ended, the economy is still faced with many challenges ahead. Factors such as income inequality remain or have worsened. Wages are at a point of stagnation and pension & medical costs are at an all-time high

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