Don't expect Microsoft to relive explosive past

Your Money

May 16, 2004|By ANDREW LECKEY

I'M A CONSERVATIVE investor who never liked technology stocks until I recently bought Microsoft Corp. shares. What are the expectations for this company?

- M.M., via the Internet

Shares of the world's largest software maker lately have benefited from rising sales of software for personal computers. John Connors, its chief financial officer, has said, "We are in the midst of a corporate recovery."

The company is dominant in software for PC operating systems, with its Windows and Microsoft Office lines producing 65 percent of total revenue. It also has the MSN online service, Xbox game console, video games, server operating systems and enterprise software.

It has $71 billion in cash and investments on its balance sheet and a dramatic cash flow. Twenty percent of revenue goes to research and development. Its dividend, while not large, indicates it cares about its shareholders.

High legal costs

On the other hand, Microsoft also had legal costs of a $1.6 billion antitrust settlement with Sun Microsystems and a $596 million fine by the European Commission for monopolistic practices. It has settled a string of other lawsuits from states and competing companies, but more may be on the horizon.

The company recently agreed to allow rivals to buy access to the Windows computer code for an additional two years after the 2002 antitrust settlement expires in November 2007. This was in response to criticism it is taking too long to implement settlement provisions.

Despite optimism about the coming year, it's unlikely that the explosive growth the company enjoyed in the past will return, with revenue growth more likely to remain in the low teens.

Shares of Microsoft (MSFT) are down 3 percent this year, after a gain of 7 percent last year and a 22 percent decline in 2002. While the company's revenue rose 17 percent in its most recent quarter, net income fell 39 percent.

Consensus `buy'

Microsoft shares have more on the plus side than the minus side because the company remains such a powerhouse. The consensus recommendation from analysts who track them is a "buy," according to Thomson First Call, a Boston research firm. That consists of 16 strong buys, 14 buys and 3 holds.

Earnings are expected to increase 20 percent this year, in line with the overall software industry. Next year's expected 6 percent rise trails the 15 percent forecast industrywide. The projected five-year annualized growth rate of 10 percent lags behind the 12 percent forecast for its peers.

I'm setting up a Roth individual retirement account and thinking about investing in FPA Capital. What is your opinion of this fund?

- P.R., via the Internet

It has compiled an outstanding long-term record by seeking out-of-favor stocks unfairly punished by investors.

When cheap-enough stocks can't be found, it stashes a large portion of its portfolio in cash or bonds. Cash recently represented 28 percent of assets.

The $1.29 billion FPA Capital Fund (FPPTX) rose 47 percent over the past 12 months to rank in the upper half of small value funds. Its three-year annualized return of 19 percent puts it in the top 10 percent of its peers.

This fund has a history of putting long-term shareholders first, refreshing at a time when many other fund families have been mired in scandal.

Portfolio manager Robert Rodriguez, on board since 1984, is an experienced investor who puts much of his own money in the fund. He isn't afraid to have large concentrations in industries in which he has confidence. Concentration is somewhat of a risk and means that the fund is more volatile than many rivals.

`Little offbeat'

"The fact that this fund is a little offbeat means that it isn't always going to move in sync with its peers and can sometimes underperform by a wide margin," said Christopher Davis, analyst with Morningstar Inc. in Chicago. "But it offers good exposure to small- and mid-cap value stocks and can complement a large-cap portfolio nicely."

Nearly one-third of the fund's stock is in consumer services, with energy and industrial materials other major concentrations. Its top holdings recently were Michaels Stores, Avnet, National Oilwell, Ross Stores, Patterson-UTI Energy, Big Lots, Ensco International, Charming Shoppes, Trinity Industries and Celanese.

FPA Capital Fund requires a 5.25 percent "load" (sales charge) and a $1,500 minimum initial investment. Its annual expense ratio is a low 0.87 percent.

Andrew Leckey is a Tribune Media Services columnist. E-mail him at

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