Pat McKeough responds to many personal questions on specific stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions.

This past week, an Inner Circle member who is also a client of our portfolio management services had a question about one of Canada’s rising tech stocks. This broadcast equipment specialist, whose prominence has increased due to the upcoming Summer Olympics, is grooming itself as a takeover candidate.

Q: Dear Pat: Great to be back as a portfolio management client, and many thanks for taking me back. I must have had a mental collapse to have moved to another service temporarily. What is your view on Miranda Technologies? It has made some large leaps over the last few months and apparently may be subject to takeover bids.

A: Miranda Technologies (symbol MT on Toronto; www.miranda.com), sells equipment that helps broadcasters deliver more channels (including those that broadcast in high definition), insert advertising and graphics, and produce news.

Miranda has a manufacturing plant in Montreal, as well as regional offices in the U.S., the U.K., the Netherlands, France, Hong Kong, Japan, the United Arab Emirates and China.

The stock took a big jump on March 21, 2012, after the company said that it is making a change to its board of directors and will consider putting itself up for sale.

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Tech stocks: Miranda brings mergers and acquisitions specialist on board

At the time, Miranda reported that it had already attracted interest from a number of potential buyers. That’s partly because the company is helping convert TV stations to high-definition signals in emerging markets. It is also gaining prominence due to its role as the equipment supplier for NBC’s coverage of the Summer Olympics in London.

As well, Miranda has accepted activist shareholder JEC Capital Partners’ nomination of Tim Thorsteinson to its board. Boston-based JEC owns 10% of Miranda’s shares.

In the three months ended December 31, 2011, Miranda’s revenue rose 11.6%, to a record $50.1 million from $44.9 million a year earlier. Earnings rose 4.3%, to $3.5 million from $3.3 million. Earnings per share rose 6.7%, to $0.16 from $0.15, on fewer shares outstanding. The company holds cash of $31.4 million, or $1.44 a share, and has no debt.

In the most recent Inner Circle Q&A, Pat examines the prospects for the potential takeover under the company’s new CEO. He also looks at whether Miranda can continue to grow whether or not it is taken over. He concludes with his clear buy-hold-sell advice on the stock.

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That’s partly because Visa is in a strong position to profit from the global surge in e-commerce and cashless transactions. At the same time, its trusted brand will help it keep expanding in fast-growing markets like Asia and Latin America.

Moreover, Visa is a financial intermediary, so it doesn’t lose money if cardholders fail to pay their bills. Instead, banks that issue Visa cards assume liability, set repayment terms and evaluate customer creditworthiness. That cuts Visa Inc.’s risk.

VISA INC. $116 (New York symbol V; Conservative Growth Portfolio, Finance sector; Shares outstanding: 813.3 million; Market cap: $94.3 billion; Price-to-sales ratio: 9.8; Dividend yield: 0.8%; TSINetwork Rating: Above Average; www.visa.com) operates the world’s largest retail electronic payments network. The company processes credit, debit, prepaid and commercial payments under the Visa, Visa Electron, Interlink and PLUS brands.

Visa’s credit cards are accepted around the world. Visa/PLUS is one of the largest global automated teller machine networks, offering cash access in more than 200 countries.

The company first sold shares to the public at $44; it began trading on New York in March 2008.

The company gets its revenue from fees it charges card issuers and merchants for using its network. These fees are based on payment volume, transactions processed and other factors.

Visa continues to benefit as more people make purchases with credit and debit cards instead of cash. That helped push up the company’s revenue by 46.7%, from $6.3 billion in 2008 to $9.2 billion in 2011 (Visa’s fiscal years end September 30).

Earnings doubled in four years

Earnings jumped 114.7%, from $1.7 billion in 2008 to $3.65 billion in 2011. The company is an aggressive buyer of its own shares. Because of fewer shares outstanding, earnings per share rose at a faster pace of 121.8%, from $2.25 in 2008 to $4.99 in 2011.

In the first quarter of fiscal 2012, which ended December 31, 2011, Visa’s revenue rose 13.8%, to $2.5 billion from $2.2 billion a year earlier. Earnings rose 16.4%, to $1.0 billion from $884 million. The company processed 13.6 billion transactions in the quarter, up 8.1% from 12.6 billion.

Visa spent $75 million on share buybacks during the quarter (it plans to repurchase $500 million of its stock by February 2013). As a result, earnings per share rose 21.1%, to $1.49 from $1.23.

International revenue (which accounts for 46% of the total) jumped 21.1% in the first quarter. U.S. revenue (54% of the total) rose 8.4%. The slower U.S. growth is mainly due to new rules that include a 50% cut in the fees that retailers pay banks when they accept debit cards.

New debit card rules a minor setback

Banks prefer to issue debit cards instead of credit cards, because purchases are made directly from the user’s bank account. That cuts the bank’s credit risk. However, some U.S. banks will probably raise debit fees to recover the lower fees they receive from retailers. Retailers may also try to save money by shifting to other processing networks. These factors would hurt debit volumes.

Visa is working with its clients to modify the fees it charges. This should help it hang on to most of these customers. As well, many of its clients will likely stick with Visa due to its broad geographic reach.

Consumers who use debit cards tend to spend less than credit card users. Still, the long-term outlook for debit cards is bright. In the latest quarter, the dollar value of debit volumes rose 13.1% (excluding the impact of foreign exchange rates) and accounted for 57% of Visa’s total volumes. That’s mainly because of a 19.1% jump in overseas volumes compared with just a 5.9% rise in the U.S.

Visa is also offering more services for processing transactions made with cellphones and other mobile devices. These services have strong appeal in developing countries, where many consumers do not have bank accounts.

To fuel its growth in this area, Visa bought South Africa-based Fundamo for $110 million in June 2011. Fundamo has 5 million subscribers in Africa, Asia and the Middle East who use its technology to transfer cash, pay bills and access their bank accounts through their mobile phones.

In addition, Visa has formed an alliance with U.K.-based Monitise plc, which provides mobile banking services in developed countries. That will help Visa offer more mobile services to its existing cardholders.

New online business looks promising

Visa also aims to take advantage of the growing popularity of video games and social networking websites. That’s why it paid $225 million for PlaySpan Inc., which manages player purchases of such things as extra weapons and extra levels. PlaySpan is used with over 1,000 online games.

The company can easily afford to keep making acquisitions. It holds cash and securities of $3.6 billion, or $4.48 a share, and has no long-term debt.

Thanks to its improving outlook, Visa recently raised its dividend by 46.7%. The new annual rate of $0.88 yields just 0.8%. However, dividends account for just 13% of Visa’s fiscal 2011 earnings, so there’s plenty of room to keep increasing the payout.

Visa should earn $5.85 a share in fiscal 2012. The stock trades at 19.8 times that estimate. That’s a somewhat high p/e ratio, but it’s still reasonable in light of Visa’s strong growth prospects.

Visa is a buy.

MOTOROLA SOLUTIONS INC. $50 (New York symbol MSI; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 325.5 million; Market cap: $16.3 billion; Price-to-sales ratio: 1.9; Dividend yield: 1.8%; TSINetwork Rating: Average; www.motorolasolutions.com) took its current form on January 4, 2011, following the breakup of the old Motorola Inc. The company makes specialized equipment, including bar-code scanners and radios for emergency vehicles. Governments supply 65% of its revenue; the remaining 35% comes from businesses.

In 2011, Motorola Solutions earned $888 million, or $2.61 a share. That’s up 42.5% from $623 million, or $1.84 a share, in 2010. These figures exclude several unusual items, mainly costs related to the spinoff from Motorola Inc. Sales rose 7.7%, to $8.2 billion from $7.6 billion.

The company’s sales will likely rise by just 5% in 2012, due to slowing demand for its current wireless networking equipment and government budget cuts. However, Motorola Solutions continues to devote nearly 13% of its sales to research. This is helping it develop new products that take advantage of faster wireless technologies.

The stock has gained 35% since the spinoff. It now trades at a reasonable 18.8 times its projected 2012 earnings of $2.66 a share. The $0.88 dividend yields 1.8%.

Motorola Solutions is a buy.

AGILENT TECHNOLOGIES INC. $43 (New York symbol A; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 347.5 million; Market cap: $14.9 billion; Price-to-sales ratio: 2.2; Dividend yield: 0.9%; TSINetwork Rating: Average; www.agilent.com) makes testing systems that improve electronic products, such as cellphones. It also makes medical equipment that detects and measures substances in blood and other patient samples.

Agilent was a subsidiary of Hewlett-Packard Co. until 1999, when Hewlett spun it off as a separate company.

In its 2012 first quarter, which ended January 31, 2012, Agilent’s revenue rose 7.6%, to $1.64 billion from $1.5 billion a year earlier. Strong gains from its life sciences division offset weaker demand for testing equipment. Agilent received $1.6 billion of new orders in the quarter, unchanged from a year ago.

The company earned $244 million in the quarter, or $0.69 a share. That’s up 15.1% from $212 million, or $0.60 a share, a year earlier. These figures exclude unusual items, such as costs to integrate acquisitions. Agilent spends 10% of its revenue on research, so it’s more profitable than it appears.

The stock is up 22% since the start of 2012. Even so, it trades at just 13.5 times the $3.19 a share that Agilent will probably earn this year. The $0.40 dividend yields 0.9%.

Agilent is a buy.

AT&T INC. $30 (New York symbol T; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 5.9 billion; Market cap: $177.0 billion; Price-to-sales ratio: 1.4; Dividend yield: 5.9%; TSINetwork Rating: Average; www.att.com) gets 50% of its revenue from its 103.2 million wireless customers. The other 50% mainly comes from its 39.0 million telephone clients and 16.4 million high-speed Internet users.

The company recently cancelled its plan to buy rival wireless carrier T-Mobile from Germany’s Deutsche Telekom AG; AT&T felt that competition regulators would have blocked the deal.

As a result, AT&T will pay Deutsche Telekom a $4-billion breakup fee, consisting of $3 billion in cash and $1 billion of wireless spectrum. That’s partly why AT&T’s earnings fell 80.1% in 2011, to $3.9 billion, or $0.66 a share. In 2010, it earned $19.9 billion, or $3.35 a share. Without unusual items, earnings per share would have fallen 3.9%, to $2.20 from $2.29.

Revenue rose 2.0%, to $126.7 billion from $124.3 billion. The company saw gains in Internet (up 7.4%) and wireless (up 6.0%). However, revenue from regular phone services fell 11.3%.

Demand for new smartphones should push up AT&T’s earnings to $2.34 a share in 2012. The stock trades at just 12.8 times that estimate. The company also recently raised its dividend by 2.3%. The new annual rate of $1.76 yields 5.9%.

AT&T is a buy.

VERIZON COMMUNICATIONS INC. $38 (New York symbol VZ, Conservative Growth Portfolio, Utilities sector; Shares outstanding: 2.8 billion; Market cap: $106.4 billion; Price-to-sales ratio: 1.0; Dividend yield: 5.3%; TSINetwork Rating: Average; www.verizon.com) is the largest provider of wireless
services in the U.S., with 108.7 million subscribers. Wireless accounts for 63% of its revenue. It also has 24.1 million phone and Internet customers.

In 2011, Verizon added 6.3 million new wireless subscribers (net of deactivations) and 278,000 new high-speed Internet customers. These gains offset the loss of 1.9 million phone customers.

Verizon’s overall revenue rose 4.0% in 2011, to $110.9 billion from $106.6 billion in 2010. Earnings fell 5.7%, to $2.4 billion, or $0.85 a share, from $2.5 billion, or $0.90 a share. However, if you exclude unusual items, such as contributions from businesses that Verizon sold and costs to repair storm damage, earnings per share would have risen 3.4%, to $2.15 from $2.08.

The stock trades at 15.3 times the $2.49 a share that Verizon should earn in 2012. That’s a higher p/e than AT&T, but it’s still reasonable in light of Verizon’s strong prospects. The $2.00 dividend yields 5.3%.

Verizon is a buy.

Mosaid Inc. was our second-most-recent winner, with a $46-ashare offer from Sterling Partners. That gave us a 107.2% gain in the 18 months from our first recommendation in May 2010.

Our latest pick to attract a takeover at a high profit to our subscribers is RuggedCom $33, symbol RCM on Toronto.

RuggedCom has attracted two bids. First, a hostile bid at $22 from Belden Inc., and now, a friendly bid at $33 from Siemens Canada.

RuggedCom is up 135.7% since December 2011, when the bidding war began.

Investors often ask how we have managed to recommend so many stocks over the years that get taken over.

One key is that we aim to pick stocks with hidden value that attracts less investor attention than it deserves. That not only gives buyers a bargain, but it cuts the risk of crippling losses. It also attracts takeover bids.

The company also makes Adobe Flash, which lets website developers make their pages more interactive by adding animation and video.

Adobe recently stopped making Flash for smartphones and other mobile devices. Instead, it will focus on developing products that are based on the newer HTML5 Internet standard.

Meanwhile, strong demand for Adobe’s products pushed up its revenue by 11.0% in its third quarter, which ended December 2, 2011, to a record $4.2 billion from $3.8 billion in 2010.

Earnings rose 20.0%, to $1.2 billion from $1.0 billion. Adobe spent $695 million on share buybacks in the past year. Because of fewer shares outstanding, earnings per share rose 21.8%, to $2.35 from $1.93.

The company holds cash of $2.9 billion, or $5.78 a share. Its long-term debt of $1.5 billion is a low 9.4% of its $16.0-billion market cap.

Adobe Systems is still a hold.

FAIR ISAAC CORP. $38.98 (New York symbol FICO; TSINetwork Rating: Average) (415-472-2211; www.fairisaac.com; Shares outstanding: 36.0 million; Market cap: $1.4 billion; Dividend yield: 0.2%) makes FICO Scores, which dominates the market for software that helps businesses evaluate customer creditworthiness. The company is also profiting by selling software that helps credit card issuers control fraud and analyze their clients’ spending patterns.

In its fiscal 2012 first quarter, which ended December 31, 2011, Fair Isaac’s earnings jumped 87.4%, to $30.0 million from $16.0 million a year earlier. Earnings per share rose 107.5% to $0.83 from $0.40, on fewer shares outstanding. The latest earnings also beat the consensus estimate of $0.62 a share.

Savings from the company’s ongoing cost cuts were a big reason for the increase. Sales rose 9.2%, to $170.3 million from $155.9 million.

Fair Isaac spends around 10% of its sales on research. That lets it keep producing innovative new products that help it stay ahead of its competitors.

The company’s balance sheet is sound. It holds cash and securities of $231.6 million, or $6.28 a share. Its long-term debt of $504 million is a manageable 36.0% of its market cap.

Fair Isaac should earn $2.52 a share in fiscal 2012. The shares have risen 95% since the start of October 2011, but they still trade at just 15.5 times that figure.

Fair Isaac is still a buy.

RIM has appointed Thorsten Heins as its new chief executive officer and a director of the company. Previously, he was RIM’s chief operating officer. The company’s founders and former co-CEOs, Jim Balsillie and Mike Lazaridis, will remain directors.

As well, the company has appointed Prem Watsa as a director. Mr. Watsa is the chairman and founder of Fairfax Financial Holdings.

Mr. Watsa should help RIM attract more accomplished, high-profile directors. To top it off, Mr. Watsa has a reputation as a canny investor. His investment draws attention to RIM’s value. We think this will increase the value of Fairfax’s stake in the company.

Fairfax Financial is now a buy.

Tech stocks continue to make headlines. Often, this is due to the competitive race to get new products on the market. Sometimes, it is due to the spectacular rise—or spectacular fall—of a tech stock’s share price. But successful investors look beyond the headlines, to a company’s measurable strengths and weaknesses, to judge its long-term prospects, as we do today with one of the best-known names in the industry.

GOOGLE INC. (Nasdaq symbol GOOG; investor.google.com) is the world’s leading Internet search engine. The search service is free, but it provides a platform for Google to sell ads on its websites. Ads account for 96% of its total revenue.

Google continues to hire new employees as it builds up its non-search operations, including its Google+ social-networking site. Google+ now has 90 million users, up from 40 million in October 2011.

Even with these extra expenses, Google’s earnings in the three months ended December 31, 2011 rose 9.7%, to $3.1 billion from $2.85 billion a year earlier. Earnings per share rose 8.6%, to $9.50 from $8.75, on more shares outstanding. These figures exclude unusual items, mainly stock options paid to employees.

Tech stocks: Advertisers get more clicks on Google ads, but pay less

Revenue in the quarter rose 25.4%, to $10.6 billion from $8.4 billion. Google charges advertisers every time a user clicks on one of their ads. In the latest quarter, paid clicks rose 34%. However, the average cost advertisers pay per click fell 8%.

The company spends 13% of its revenue on research, so it’s more profitable than it seems. Moreover, Google holds cash and investments of $44.6 billion, or $137.78 a share.

In the latest edition of Wall Street Stock Forecaster, we examine Google’s ability to sustain its leading position in the ever-changing Internet search engine industry. We also look at the recent surge from Apple (symbol AAPL on New York), another stock we cover in Wall Street Stock Forecaster. We conclude with our clear buy-hold-sell advice on both stocks.

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After nearly going bankrupt in the 1990s, the company decided to shift toward selling its expertise and away from making computers. IBM now gets most of its revenue from steady, predictable long-term support and maintenance contracts. That cuts its risk.

The company is now using its rising profits to expand into promising new areas, such as cloud computing and software that helps businesses quickly analyze large amounts of data. IBM’s strong reputation is also helping it expand in Asia and Latin America. That makes it less reliant on slower-growing regions like North America and Europe.

This is the second time we’ve made IBM our Stock of the Year; it was also our #1 pick in 2010. We feel the stock gives conservative investors a unique, low-risk way to profit from rising Internet use, particularly in emerging markets.

INTERNATIONAL BUSINESS MACHINES CORP. $192 (New York symbol IBM, Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 1.2 billion; Market cap: $230.4 billion; Price-to-sales ratio: 2.1; Dividend yield: 1.6%; TSINetwork Rating: Above Average; www.ibm.com) is the world’s oldest computer company (it began operating in 1911), with operations in over 170 countries.

The company continues to profit from its move away from mainframe computers and toward designing computer systems and managing them on behalf of its clients. The resulting long-term maintenance contracts give it more dependable revenue streams. IBM now gets 55% of its revenue from services.

The company continues to rapidly grow its software business. Right now, it is particularly focused on developing analytics software, which helps businesses and government agencies gather and analyze a wide variety of data. In addition, IBM makes software for applications ranging from traffic management to power grids and food production. Software now supplies 25% of IBM’s overall revenue.

The company still gets 18% of its revenue from its computer hardware business. The remaining 2% comes from its financing division.

IBM’s revenue rose 4.9%, from $98.8 billion in 2007 to $103.6 billion in 2008. Revenue fell 7.6% in 2009, to $95.8 billion, as the recession hurt demand for computers and consulting services. However, revenue rose 11.7%, to $106.9 billion, in 2011.

Recession couldn’t stop rising profits

Even with the uneven revenue, IBM’s earnings rose 56.6%, from $10.4 billion in 2007 to $16.3 billion in 2011. Earnings per share jumped 87.2%, from $7.18 in 2007 to $13.44 in 2011, on fewer shares outstanding.

IBM’s high research spending helps it maintain its dominance in the rapidly changing technology business. It spent $6.3 billion (or 5.9% of its revenue) on research in 2011, up 3.8% from $6.0 billion (or 6.0% of revenue) in 2010. Accounting rules force IBM to immediately write off these costs, so it’s more profitable than it appears.

In 2011, IBM received 6,180 patents in the U.S., up 4.8% from the prior year. This was also the 19th consecutive year that IBM received more patents than any other company. Licensing intellectual property generates around $1.1 billion in pre-tax annual income for IBM each year.

The company’s research spending is also helping make it a leader in the fast-growing field of cloud computing. That’s where data and software are kept on one or more centralized servers. Users connect to these servers over the Internet.

Cloud computing makes IBM’s clients more productive, cuts their costs and improves security. IBM’s revenue from cloud services more than tripled in 2011.

IBM’s strong reputation should give it an advantage over its cloud-computing competitors, because many businesses will be reluctant to trust sensitive data to less-familiar providers.

Dominating in high-growth markets

IBM’s reputation and new products will also help it expand in fast-growing markets, such as China, Russia, India and Brazil. In 2011, revenue from countries like these rose 16% (or 11% if you exclude the positive impact of foreign-exchange rates). These markets now account for 22% of IBM’s revenue. The company feels that will rise to 30% by 2015.

IBM is also expanding its expertise by purchasing other technology firms. That adds risk, but most of these are small companies that the company can easily integrate into its current businesses. IBM has earmarked $20 billion for acquisitions between 2010 and 2015.

The company’s strong balance sheet will easily support its expansion plans. Its $22.9 billion of long-term debt is a low 10% of its market cap. That debt is also just 1.1 times IBM’s 2011 cash flow of $21.4 billion. In addition, the company holds cash and investments of $11.9 billion, or $9.80 a share.

IBM signed $47 billion of new service contracts in 2011. Its service division’s order backlog is now $141 billion. That’s equal to 132% of IBM’s annual revenue.

Buffett stake attracts investor interest

IBM’s shares have gained 19% in the past year. That’s partly due to the November 2011 news that billionaire investor Warren Buffett now owns 5.4% of IBM through his Berkshire Hathaway Inc. (New York symbol BRK.A) holding company. This was Mr. Buffett’s first major investment in a technology company.

IBM trades at just 12.9 times the $14.85 a share that it expects to earn in 2012. The company also expects its earnings to rise to $20.00 a share by 2015. That gives it plenty of room to keep raising its dividend. The current annual rate of $3.00 a share yields 1.6%.

IBM is our #1 buy for 2012.

APPLE INC. $447 (Nasdaq symbol AAPL; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 932.2 million; Market cap: $416.7 billion; Price-to-sales ratio: 3.1; No dividends paid; TSINetwork Rating: Average; www.apple.com) makes computers and a wide range of electronic devices, including the iPhone and iPad tablet computer.

Apple recently teamed up with several leading textbook publishers to make more titles available to iPad and iPhone users. The company has also launched its new iBooks 2 software, which makes it easy for students to use Apple devices to take notes and search within text. Publishers can also use the program to quickly update content and add features, like video.

This could be a huge market for Apple. By 2020, e-books could account for half of all textbook sales, up from just 3% in 2011.

Meanwhile, Apple earned $13.1 billion, or $13.87 a share, in its 2012 first fiscal quarter, which ended December 31, 2011. That’s up 117.6% from $6.0 billion, or $6.43 a share a year earlier. Sales jumped 73.3%, to $46.3 billion from $26.7 billion. iPhone sales soared 133.3%, iPad sales jumped 98.6% and Mac computer sales rose 21.5%. Sales of iPod music players fell 26.2%, but that’s mainly because iPod users upgraded to iPhones.

The stock hit a new all-time high of $454.45 in January 2012 before moving down to its current price. Even so, it trades at 12.5 times the $35.67 a share that Apple should earn in fiscal 2012. That’s a particularly low p/e ratio for a company with a loyal worldwide customer base. Apple should also continue to dominate the fast-growing smartphone and tablet computer markets.

Moreover, Apple is debt-free, and held cash and investments of $97.6 billion, or $104.70 a share, as of December 31, 2011. That gives it plenty of room to keep developing new products and perhaps start paying a dividend.

Apple is a buy.

MICROSOFT CORP. $30 (Nasdaq symbol MSFT; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 8.4 billion; Market cap: $252.0 billion; Price-to-sales ratio: 3.4; Dividend yield: 2.7%; TSINetwork Rating: Above Average; www.microsoft.com) gets 80% of its sales from its Windows operating system and Office suite of business software. However, the company is taking steps to expand into other areas, as well.

For example, Microsoft recently entered into an alliance with Nokia Corp. (New York symbol NOK). Under this deal, Nokia will make mobile phones that use Microsoft’s Windows Phone software.

Microsoft also paid $8.5 billion in October 2011 for Skype Global. Skype’s software lets computer users make free phone calls over the Internet. Microsoft feels that Skype will enhance its Xbox Live service, which lets users of its Xbox video game consoles communicate with each other online.

In its fiscal 2012 second quarter, which ended December 31, 2011, Microsoft earned $6.62 billion, down slightly from $6.63 billion a year earlier. Earnings per share rose 1.3%, to $0.78 from $0.77, on fewer shares outstanding.

Sales rose 4.7%, to $20.9 billion from $20.0 billion. The company continues to see strong sales growth from its Xbox video games (up 15%), server software (up 11%), online services, such as its Bing search engine (up 10%), and Office (up 3%).

However, sales of Windows fell 6% as floods in Thailand have caused a hard drive shortage. That has slowed sales of new computers, most of which come with Windows pre-installed. Consumers are also putting off buying new computers until Microsoft releases the next version of Windows later in 2012.

Microsoft spent $2.4 billion (or 11.4% of its revenue) on research in the latest quarter. That’s up 8.5% from $2.2 billion (or 11.0% of revenue) a year earlier.

The company can easily afford to keep making acquisitions and spending more on research. Its long-term debt of $11.9 billion is a low 5% of its market cap. It also holds cash and investments of $51.7 billion, or $6.17 a share.

Microsoft trades at just 11.2 times the $2.69 a share that it will likely earn in fiscal 2012. The $0.80 dividend yields 2.7%.

Microsoft is a buy.

GOOGLE INC. $569 (Nasdaq symbol GOOG; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 323.9 million; Market cap: $184.3 billion; Price-to-sales ratio: 5.0; No dividends paid; TSINetwork Rating: Above Average; www.google.com) is the world’s leading Internet search engine. The search service is free, but it provides a platform for Google to sell ads on its websites. Ads account for 96% of its total revenue.

Google continues to hire new employees as it builds up its non-search operations, including its Google+ social-networking site. Google+ now has 90 million users, up from 40 million in October 2011.

Even with these extra expenses, Google’s earnings in the three months ended December 31, 2011 rose 9.7%, to $3.1 billion from $2.85 billion a year earlier. Earnings per share rose 8.6%, to $9.50 from $8.75, on more shares outstanding. These figures exclude unusual items, mainly stock options paid to employees.

Revenue in the quarter rose 25.4%, to $10.6 billion from $8.4 billion. Google charges advertisers every time a user clicks on one of their ads. In the latest quarter, paid clicks rose 34%. However, the average cost advertisers pay per click fell 8%.

Google will probably earn $38.30 a share in 2012. The stock trades at 14.9 times that estimate. That’s a particularly low p/e ratio for a company that dominates a fast-growing industry like Internet search.

As well, the company spends 13% of its revenue on research, so it’s more profitable than it seems. Moreover, Google holds cash and investments of $44.6 billion, or $137.78 a share.

Google is a buy.