Microsoft Profit View Lowered by Oppenheimer

Oppenheimer has reduced its profit estimates of Microsoft Corp. (NASDAQ:MSFT), saying the Thailand floods and macro headwinds are pressuring the PC market.

The brokerage cut its fiscal 2012 earnings estimate for Microsoft to $2.66 a share from $2.68 a share and revenue forecast to $74.63 billion from $75.03 billion. Oppenheimer also slashed its fiscal 2013 earnings view to $2.94 a share from $2.95 a share and revenue projection to $79.87 billion from $80.28 billion.

Wall Street expects the software giant to earn $2.74 a share on revenue of $74.68 billion for fiscal 2012. For fiscal 2013, they expect earnings of $3.03 a share on revenue of $80.34 billion, according to analysts polled by Thomson Reuters.

Following our channel checks and management's recent commentary at a competitor's conference, we believe the PC market is more challenging than we had originally anticipated. We believe a combination of an increasingly difficult IT environment, lackluster consumer demand and HDD shortages are weighing on the PC market, analyst Brad Reback wrote in a note to clients.

While we think MSFT is likely offsetting some of these headwinds, due to the ongoing Windows 7 corporate refresh, we don't believe it's enough and now anticipate its Windows revenue to decline in the low-to-mid single-digits in 2Q12 and 3Q12, added Reback.

While both IDC and Gartner reduced their PC estimates in December to about 1 percent drop, given a more challenging IT environment and a more severe negative impact from Thailand, Microsoft believes these estimates are likely to decline lower. Reback now expects about 3 percent decline in the PC market in December.

Reback, however, has an outperform rating on Microsoft stock and recommends it for long-term investors.

MSFT trades at about 10x our CY12E EPS of $2.79. While valuation is compelling, given our view the next few quarters will likely be challenging for the company, we believe the stock could give back some of its recent outperformance, but we still recommend it for long-term investors, the analyst said.

Shares of Microsoft closed Tuesday's regular trading session at $27.84. Reback has a price target of $32 on Microsoft stock.