It's still no Google, but Microsoft stock may be rising from years of slumber. After steadily losing value this year and hovering around...

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It’s still no Google, but Microsoft stock may be rising from years of slumber.

After steadily losing value this year and hovering around $26 for three years, the stock abruptly rose 6 percent after a rousing financial-analyst meeting July 28 in Redmond, where Chief Executive Steve Ballmer lectured investors on how they’re overlooking the company’s potential.

Analysts responded by issuing mostly favorable reports and increasing their average estimate of the company’s fiscal-year sales.

Not all analysts were convinced, and it remains to be seen whether the gains will survive what could be a modest performance in the current quarter. But for now, the company is enjoying a newfound respect and a faint taste of former glory.

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“There definitely has been a significant change — the Street has begun to consider the possibility that this is actually a new Microsoft,” said Mark Stahlman at Caris & Co. in New York, who reiterated his “buy” rating on the stock after the meeting.

Stahlman does not own the stock, and his firm has no banking business with the company.

Others said the meeting reminded investors of the company’s financial strength, explained its broadening line of products and showed new products likely to boost earnings in the coming year.

“It’s been a growth story. It just hasn’t been trading like a growth story, partly because the company has been so cautious,” said analyst Charles Di Bona at Bernstein & Co.

Di Bona expects the stock to reach $32.50 within a year. He said some investors are speculating that the company’s board will increase the size of the regular dividend when it meets this month. Others are excited about specific products disclosed at the analyst meeting, including higher-priced, premium versions of Office.

“I think a lot of what they said was not new news, right? But I think just the way they said it, they were just more emphatic about the growth prospects,” Di Bona said. “I think that was part of it.”

Di Bona doesn’t own the stock personally, and his firm doesn’t do investment banking with Microsoft, but Bernstein’s parent company, Alliance Capital, is a shareholder.

The analyst-day bump withstood the bad news delivered Thursday by Dell, Microsoft’s biggest customer. Dell missed earnings targets and lowered its outlook, dragging down computer-industry stocks.

Microsoft fell 22 cents to $27.05 Friday but held on to the gains made since the analyst meeting. It’s still up 6 percent since then and up 1 percent for the year.

New products on horizon

Although the gains are still modest compared with hot technology stocks, every little bit is important to thousands of current and former employees in the Puget Sound region who have stock options.

Microsoft and JP Morgan bought out most of the options in 2003, but optimistic employees held on to nearly a billion shares. Most of those options are now right on the edge of having value.

As of Microsoft’s annual report in September, there were 949 million options remaining with an average exercise price of $29.26. That was before a $3 dividend in December that adjusted options values to reflect the post-dividend price.

Chief Financial Officer Chris Liddell said there’s more at work than the analyst meeting but he acknowledged the presentations are “resonating with investors.”

“I think people have been looking for a catalyst, looking for substantial evidence that the investments we’ve been making are paying off, and they’re starting to see that,” he said. “It’s not right in front of them now but at least out on the horizon.”

Recent attention has focused on Vista, the new version of Windows, but it won’t go on sale until late 2006. In the meantime the company will release new versions of several key products, including its SQL database, Xbox 360 game console and Visual Studio programming toolkit.

Microsoft is also testing a new ad-sales program and improving its search technology to better compete with Google and Yahoo!

But investors wanting bigger gains may have to be patient.

The boost from new products is not expected until after the current quarter.

Over the past month, seven of 24 analysts surveyed by Thomson Financial lowered their expectations for the current quarter. But, overall, analysts have raised their estimates for the full fiscal year ending June 30, 2006.

Since the analyst meeting, the consensus forecast for earnings per share has risen by a penny, to $1.44 per share.

Growing away from core

Not all analysts are cheering.

Merrill Lynch, in a research note Thursday, advised clients to remain “on the sidelines for now.” The firm noted that Vista and the new version of Office are more than a year away and there’s uncertainty about the cycle of system upgrades.

The firm said things look better for fiscal 2007. By then, Vista, Office and the company’s investments in new products “should start to translate into meaningful earnings upside.”

Merrill Lynch is a market maker in Microsoft’s stock and does banking and other business with the company.

Analyst Stahlman was more fired up.

“I think this is a company that is on the march and actually proceeding on multiple fronts and has an opportunity to grow a Google, a Sony and an Oracle,” he said, explaining that the company is finally growing in new areas away from its core PC business.

“A year ago, that wasn’t the takeaway,” he said. “This year, I think for the first time, it was.”

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