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Microsoft CEO Steve Ballmer (Chris Graythen/2009 Getty Images)
Microsoft CEO Steve Ballmer (Chris Graythen/2009 Getty Images)

TheStreet.com

Five undervalued, unloved technology stocks Add to ...

Technology stocks, which led the equity market in the past two months, fell sharply after Cisco on Nov. 10 revealed earnings and sales guidance that was trailed analysts' expectations.

Cisco has tumbled 19 per cent since then. Other technology stocks have been punished. Here are five high-quality technology companies selling for bargain prices. They are ordered by forward earnings multiple, from cheap to cheapest.

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5. Microsoft is the world's largest software company, selling the Windows operating system and Office product suite. It's a Dow component and technology bellwether. Since 2007, it has grown sales 6.7 per cent annually, on average, and boosted earnings per share 11 per cent a year. Yet, its stock suffered 9.1 per cent annualized losses over that span.

Quarter: Microsoft's fiscal first-quarter profit increased 51 per cent to $5.4 billion. Earnings per share advanced 55 per cent to 62 cents, boosted by a smaller float, beating the consensus by 13 per cent. Revenue grew 25 per cent to $16 billion. The gross margin widened from 83 per cent to 85 per cent and the operating margin rose from 35 per cent to 43 per cent. Microsoft held $44 billion (U.S.) of cash at the end of the quarter and $11 billion of debt, translating to quick ratio of 2.1 and a debt-to-equity ratio of 0.2.

It increased its dividend from 13 cents to 16 cents, equaling a yield of 2.5 per cent with a 24 per cent payout ratio.

Valuation: Microsoft trades at a sizable discount to comparable technology investments. Its stock sells for a trailing earnings multiple of 11, a forward earnings multiple of 9.5, a sales multiple of 3.3 and a cash flow multiple of 8.4, 65 per cent, 55 per cent, 79 per cent and 50 per cent discounts to software industry averages. Its PEG ratio, a measure of value relative to predicted long-run growth, of 0.7 signals a 30 per cent discount to estimated fair value.

Of analysts covering Microsoft, 30 advise buying its stock and 11 recommend holding. None say to sell. A median target of $32.95 implies 27 per cent upside. Catalyst: With nearly $34 billion of net cash, Microsoft has ammunition for buybacks, dividend boosts and acquisitions, all of which are beneficial to shareholders. It has completed two acquisitions, for Sentillion and AVICode, in 2010. A deal for 3D-sensing-technology firm Canesta is currently pending. Microsoft Kinect, a sensing technology compatible with its Xbox 360 gaming console, sold one million units in the first 10 days of availability.

Bullish Scenario: Stifel Financial expects Microsoft's stock to rise 54 per cent to $40.

Bearish Scenario: FBR Capital Markets predicts the stock will climb 8 per cent to $28.

4. Dell is the world's third-largest supplier of personal computers. Its focus on the consumer segment of the market hurt its financial performance during the Great Recession. Dell's revenue has stagnated since 2007 and its net income has dropped 18 per cent annually, on average. Dell's earnings per share decreased by 14 per cent a year, on average, during that span.

Quarter: Dell's third-quarter net profit more than doubled to $822 million, or 42 cents a share, as revenue jumped 19 per cent to $15 billion. Dell blew past analysts' consensus adjusted earnings target by 39 per cent, but it missed on the top-line by 2.2 per cent. The non-GAAP operating margin rose from 5.7 per cent to 7.6 per cent. Though consumer revenue dropped 4 per cent, every other unit posted double-digit percentage gains. Europe, Middle East and Africa revenue rose 15 per cent. China and Japan sales climbed 29 per cent. Large enterprise sales gained 27 per cent. And small and medium business sales rose 24 per cent.

Valuation: Dell's stock trades at a trailing earnings multiple of 17, a forward earnings multiple of 9.2, a sales multiple of 0.5 and a cash flow multiple of 7.2, 19 per cent, 39 per cent, 85 per cent and 43 per cent discounts to computer and peripheral peer averages. Its PEG ratio of 0.2 reflects and 80 per cent discount to estimated fair value.

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