My Personal Finance Journey

Personal finance observation, musing and decisions in a journey toward financial independence by 2020 with at least $3 million.


By Topics

Overall:
0. About (10)
1. My Progress (139)
2. Car & Home (107)
3. Credit (138)
4. Banking (33)
5. Saving (49)
6. Investing (308)
7. Taxes (89)
8. Spending (74)
9. Misc (97)
A. Archive (49)



MONTHLY ARCHIVE

Feb 2014 (3)
Jan 2014 (6)
Jan 2012 (1)
Apr 2011 (1)
Mar 2011 (1)
Feb 2011 (1)
Jan 2011 (1)
Dec 2010 (1)
Oct 2010 (1)
Sep 2010 (1)
Aug 2010 (1)
Jul 2010 (1)
Jun 2010 (1)
May 2010 (1)
Apr 2010 (1)
Mar 2010 (6)
Feb 2010 (2)
Jan 2010 (7)
Dec 2009 (3)
Feb 2009 (4)
Jan 2009 (8)
Dec 2008 (1)
Jun 2008 (2)
May 2008 (2)
Apr 2008 (5)
Feb 2008 (3)
Jan 2008 (15)
Dec 2007 (32)
Nov 2007 (6)
Oct 2007 (8)
Sep 2007 (9)
Aug 2007 (24)
Jul 2007 (2)
Jun 2007 (1)
May 2007 (3)
Apr 2007 (4)
Mar 2007 (4)
Feb 2007 (13)
Jan 2007 (6)
Dec 2006 (3)
Nov 2006 (7)
Oct 2006 (7)
Sep 2006 (6)
Aug 2006 (4)
Jul 2006 (10)
Jun 2006 (1)
May 2006 (3)
Apr 2006 (2)
Mar 2006 (6)
Feb 2006 (6)
Jan 2006 (3)
Dec 2005 (1)
Nov 2005 (9)
Oct 2005 (8)
Sep 2005 (13)
Aug 2005 (25)
Jul 2005 (16)
Jun 2005 (17)
May 2005 (19)
Apr 2005 (20)
Mar 2005 (24)
Feb 2005 (23)
Jan 2005 (36)
Dec 2004 (40)
Nov 2004 (34)
Oct 2004 (17)
Sep 2004 (21)
Aug 2004 (59)
Jul 2004 (37)
Jun 2004 (31)
May 2004 (29)
Apr 2004 (52)
Mar 2004 (49)
Feb 2004 (49)
Jan 2004 (31)
Dec 2003 (48)
Nov 2003 (52)
Oct 2003 (29)
Sep 2003 (8)
Aug 2003 (5)
Jul 2003 (2)
Jun 2003 (2)
May 2003 (5)
Apr 2003 (2)
Mar 2003 (2)
Feb 2003 (3)
Jan 2003 (29)



 

Two Days to SOTP Deadline

Contributed by mm | November 10, 2003 1:57 PM PST

Two days to the end of SOTP enrollment deadline, and I'm more and more leaning toward participation in the program and sale of my eligible stock options.

Admittedly, the deal is not as sweet as when it was initially offered. The sharp decline of MSFT stock price after the Q1 earning release erased at least 40% of the value to most employees. The timing cannot be worse: an unfavorable earning release, impending danger of EU investigation, massive sell-off due to mutual fund scandals, just to name a few.

However, I still favor the participation due to the following observations:

1) MSFT stock was valued at $29 a month ago does not mean $29 is MSFT's fair value.

As a value investor myself, I feel MSFT was richly valued even at today's $26 price. With the FY04 EPS guidance set at between $0.86 and $0.88 (after equity compensation), $26 means MSFT is priced at 30x next year's earnings. For a company so big that it can only grow top-line around 10% every year, the price seems excessive for me. (Of course, there are more outragously priced technology companies today, but it does not mean MSFT's price is justified.)

To calculate its value, I'm trying Quicken.com's Intrinsic Value Calculator. By putting initial earnings as $9.5b (same as guidance for FY04), put earnings growth rate at 12% for 10 years and discount rate as 11% as S&P long-term return, it can yield the intrinsic value as $26. However, growing 12% YOY for 10 years mean 10 years from now Microsoft will be selling $100 billion dollars of software per year, or $20 per living person per year, no matter whether the person is infant or senior and no matter in which country the person lives. This sounds too optimistic for me.

For reference, here are some fair value estimate or price target from institutions, all after Q1 earnings release:

Standard and Poor's: $26.10 (October 29, 2003)
Smith Barney Citigroup: $33.00 (October 24, 2003)
Lehman Brothers: $35.00 (October 24, 2003)
MorningStar: $31.00 (October 24, 2003)
Argus: $32.00 (October 24, 2003)

It appears none of them project a price higher than the break-even point for the SOTP decision.

2) Portfolio Risk Management Considerations

I believe everyone who is eligible for the program (therefore at least see MSFT is above $33 in one day in his/her employment in Microsoft -- this means hired before January 2002) has much more options below $33. Besides, many employees probably already accumulated lots of MSFT stock from ESPP or 401(k) program (disclosure: I have none in ESPP and 401(k) but my other options is 3 times more than options that are eligible for the program). Having additional stock options hanging at prices above $33 by not participating in the program and treating those options as lotteries is not a good idea for containing the risks in the personal portfolio. Even MSFT turns to $35 one year from now ($35 is the break-even price for participation/non-participation decisions in this game), people should gain much more from those options below $33 than those above $33. No-participation decisions may be a trophy if MSFT rises to $35, but in no way it's a good decision for risk management.

3) More Investment Choices If Partcipated

By selling the eligible options I can reinvest the after-tax proceeds to other investment opportunities. In addition, knowing that MSFT is going to be battered heavily during the averaging period (thanks to JPMorgan), it might be a good idea to buy some MSFT call options around December 10 as bottom fishing.

On the other hand, for no-participation decision, unless your broker lets you to write uncovered call options, there is no way to get some value out of the options until MSFT gains to above $33.

With the above reasons, I'm making up my mind to participate in the program. Of course I commit to only using the proceeds for reinvestment purposes. I'm not going to use it for a vacation or alike.

More PFBlog Articles You Might Find Interesting ...



Read More ... 308 Posts In The Same Category










This page was last rebuilt at January 27, 2014 07:56 AM PST.
 

RSS FEED





PERSONAL FINANCE BLOGS I READ

Consumerism Commentary
Get Rich Slowly
My Money Blog
All Financial Matters
The Simple Dollar






.

Error 500 - Internal server error

Error 500 - Internal server error

An internal server error has occured!
Please try again later.



Copyright 2003-2014, PFBlog.com. All Rights Reserved. (Privacy Policy)