Microsoft CEO Steve Ballmer
The good news: He's upgrading the stock to "Buy" from "neutral".
The bad news: He's only doing it because he believes an activist shareholder is going cause a small spike in the stock's price.
Hedge fund ValueAct has gathered a 1% stake in Microsoft through a $2 billion investment in the company. It reportedly wants a board seat.
Sherlund thinks ValueAct will get its board seat. He believes the noise around ValueAct fighting to get that seat will lead to a pop in the stock to $38, up from $32 today, and it could potentially reach $40.
He thinks the company is still in trouble, overall, though: "Fundamentals are still on a slippery slope as tablets erode PC’s, but stable enterprise business and strong cash flows could support a potential activist agenda for large share repurchase, substantially greater dividend and management succession plan."
He adds, "We do not think fundamentals matter so much over the next 6 months. Rather, we see potential catalyst events that can potentially alter corporate governance at the company and benefit shareholders."
He thinks ValueAct will campaign for a seat on the board by setting the following agenda for Microsoft:
- Borrow money against Microsoft's foreign cash to do a huge stock buyback.
- Use foreign income to provide a dividend.
- Ship Office for iPad, and stop foolishly trying to protect Windows tablets with Office.
- Try something different with the search business which has lost $17 billion over the last 10 years.
- Xbox is cool, but makes no money, so take a long look at the options for that business.
Those ideas would be enough for shareholders to support ValueAct. And in turn, if they could get Microsoft to enact some of these things, the stock could jump.