BROKERS’ NOTES: Buy Microsoft, sell Dis-Chem

Shaun Murison, senior market analyst at IG Markets

BUY:  Microsoft

Microsoft continues to be a leading global brand and one of the largest companies in the world. While boasting a market capitalisation of more than $2-trillion, the company does trade on a slightly more elevated p:e valuation of about 25.

The high relative valuation in the current market environment suggests a company primed for growth, which is obviously challenging for a megacap stock. However, the group’s  profit margins have improved, with substantial growth in Azure and its other cloud services products (50% a year). This segment is expected to remain accretive to growth for the company. The group’s core Office 365 offering provides a robust underpin to earnings and is an essential business tool for more than 60-million users.

The gaming segment —  which includes Xbox — is growing its subscription services and is market leading. The segment could experience a boost through the Activision acquisition, should it be realised.

We expect Microsoft to continue to record double-digit earnings growth while maintaining a modest dividend yield of 1%, in turn providing a stable total return expectation for investors.

SELL: Dis-Chem

This South African retail and wholesale health-care products and pharmaceuticals business, while perhaps not exclusively a sell at current levels, does appear to be fully valued right now.

Recently released interim results show headline earnings to have surged more than 40% against the prior year’s comparative period, though much of the growth was through acquisition.  The company trades on challenging multiples (a p:e of 22) and operates on thin margins while having relatively high levels of debt. Scaling growth from current levels through increased store footprints will bring about some further margin compression. Achieving the growth relative to current valuation expectations is likely to be realised only over a much longer period.

While Dis-Chem is a good business, the company appears to be priced for growth, which will be difficult to achieve over the medium term.