As the Graph on the Value Line report for Microsoft (MSFTFree Research Report for Microsoft) clearly displays, the shares have been range Using the VL Page_Graphbound since the early 2000s. It seems as if the shares can’t stay above about $32 (the lone exception being a brief period at the end of 2007 that lasted into early 2008 when the shares traded as high as $37.50—note that the high and low prices for each year are listed above the Graph). After two brief bounces back to the $32 level in late 2009 and early 2010, the shares are once again encroaching on that level in early 2012.

Clearly that $32 level is a resistance point.  Earnings, meanwhile, are well more than twice the level they were when the shares traded meaningfully above $32 leading up to the tech crash in the early part of the last decade. The company’s earnings history can be viewed in the Statistical Array. The initiation of a dividend payment in 2003 is also clearly evident. Clearly, Microsoft is viewed very differently today than it was a little Using the VL Page_Historical Arrayover a decade ago. Things change fast on Wall Street, and often even faster in the world of technology, but is this apparent $32 price ceiling realistic?

Microsoft is a household name in most countries and has a massive market position. It has over $50 billion in cash on its balance sheet (noted in the Current Position box) derived from all corners of the world. It has very little debt (shown in the Capital Using the VL Page_Current Position BoxStructure box, which is just above the Current Position box) and much of that debt is related to strategic cash management decisions. And its earnings, though not up every year, have a clear upward trajectory. So, from a quick overview, the company seems to have some things going for it.

Using some proprietary Value Line statistics to dig a bit deeper, Microsoft has been awarded the highest possible Financial Strength rating (A++); it has a relatively high Earnings Predictability score (85); and a Price Stability index near the top of the range (90). That last metric, of course, is part of the problem—the share price has been a bit too stable and has led to a Price Growth Using the VL Page_Ratings BoxPersistence of 30, which is relatively poor. All of these metrics can be found in the Ratings box at the bottom right of a Value Line report. They also provide a compelling statistical support to the story noted above.

So what is an investor to think? First off, the Value Line Safety Rank of 1 and a beta of 0.85 suggest that Microsoft is not a high-risk investment. The Safety rank, which can be found with Beta in the Ranks box at the top left of each Value Line report, is computed by averaging the Price Stability Index and the Financial Strength rating. Basically, sleeping well at night shouldn’t be an issue if one were to invest in Microsoft shares.

Using the VL Page_Timeliness Ranks BoxSecond, Value Line’s Timeliness Rank for Microsoft was lowered to a 2 (Above Average) on November 4, 2011 (this information is also found in the Ranks box). The rank being dropped is clearly not a positive; however the issue is still expected to outperform the broader market over the coming six to 12 months. For a large and financially strong company, a Rank of 2 is still a pretty strong statement.

In addition to these statistically driven measures, Value Line’s analysts use their projections (found to the far right of in the Statistical Array) to compute expected share price performance over the next three to five years. Clearly, a single price target is a bit misleading, so a range (the width of which is based off of the Safety Rank) is created. For Microsoft, that range is $45 to $55, which is displayed in the Projections box and visually by the dotted lines to the far right of the Graph. Using the VL Page_Projections BoxUsing these price points, and including dividends, Value Line’s analyst expects the shares to return between 13% and 18% per year over the next three to five years.

The logic behind these projections is clearly spelled out in the Analyst Comment, and include solid results from current products and expected strong results from new offerings. Also noted in the comment is a stock buyback program that has taken the share count down over 20% from their peak in 2004.

So, although Microsoft isn’t in the elite group of 100 stocks that earn a Timeliness Rank of 1, our statistically driven model still expects the shares to outperform over the next six to 12 months. Additionally, longer-term projections support equally compelling long-term price and performance projections. And, all this comes in the form of a relatively low risk package.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.