Adobe's Looks Attractive after Beating Earnings Estimates
In this article, let's take a look at Adobe Systems Inc. (ADBE), a $41.16 billion market cap company, which provides a line of software and services used by marketers, knowledge workers, application developers, enterprises and consumers. The company markets and licenses its software to enterprise customers through its sales force and to end users through app stores and its website.
Results and price return
The company reported stronger earnings. Second-quarter 2015 earnings of $0.34 cents per share, beat consensus estimates and reported results at the high end of its guidance range. But following the earnings release, share price declined 1.4% due to weaker-than-expected guidance for the upcoming quarter as well as full-year 2015.
Analysts at Argus increased their price target to $95 from $85 while maintaining their "buy" rating. The stock price jumped more than 3% in a single day, and at the actual price of $82.28, the return will be 15.5%.
However, Yahoo! Finance estimated one-year target share price is $ 87.95, considering the actual price the return from price appreciation would be 6.9%. In addition, you have to consider any cash flow received by the asset. But Adobe doesn't pay dividends. So the total expected return for investing in the firm is 6.9%, which we believe is not as attractive as the other projection.
The company continues shifting its business model away from sales of licenses to cloud and subscription services. This transition to the cloud is working well, while being effective in being close to the customer, maintaining frequent updates. Consumers can always have access to the most recent updates and to online storage.
Fund's positions
As of the end of March 2015, Adobe represents Jeffrey Ubben's largest holding in terms of value. The fund holds 16.0 million shares of the company valued at $1.18 billion. The position represents 6.54% of the equity portfolio and remained flat over the first quarter. Meanwhile, during the quarter, the stock of Adobe increased by 1.71%.
Among other investors, Stephen Mandel�s Lone Pine Capital disclosed holding 12.05 million shares of Adobe, the value of the stake amounting to $890.63 million; the position represents 3.37% in the fund's 13F portfolio.
Revenues, margins and profitability
Revenue increased by 8.8% in the second quarter when compared to the same quarter one year prior, to $1.16 billion from $1.06 billion. Along with this, earnings per share significantly increased by 70.5% in the second quarter compared to the same quarter a year ago. During the past fiscal year, the company reported lower earnings of $0.52 versus $0.57 in the prior year. This year, the market expects an improvement in earnings ($2.05 versus $0.52).
Finally, let�s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
Ticker | Company | ROE (%) |
ADBE | Adobe | 4.59 |
WDAY | Workday Inc | -22.08 |
ANSS | AnsysInc | 11.50 |
SAP | SAP SE | 17.13 |
Industry Median | 6.53 |
The company has a current ROE of 4.59% which is lower than the industry peers. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, SAP SE (SAP) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Quarter Ended | Nov-12 | Feb-13 | May-13 | Aug13 | Nov-13 | Feb-14 | May-14 | Aug14 | Nov-14 | Feb-15 |
ROE (%) | 13.57 | 3.87 | 4.46 | 4.82 | 3.85 | 2.82 | 5.35 | 2.67 | 5.22 | 5.08 |
Relative valuation
In terms of valuation, the stock sells at a trailing P/E of 136.5x, trading at a premium compared to a median of 25.7x for the industry. To use another metric, its price-to-book ratio of 6.22x indicates a premium versus the industry average of 2.22x while the price-to-sales ratio of 9.83x is above the industry median of 2.32x. All these metrics indicate that the stock is relatively overvalued. The stock price increased by 13.96% over the past 12 months, and we feel this has driven it to a level which is now expensive compared to the industry.
The stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $25,169, which represents a 20.3% compound annual growth rate (CAGR).
Final comment
As outlined in the article, the company reported good Q2 results with earnings exceeding market�s expectations. There are several key drivers, like the strong market position, the innovative pricing model and strong balance sheet makes me feel bullish on the stock. For those reasons, I would recommend adding this stock to long-term portfolios. Hedge fund gurus like Joel Greenblatt (Trades, Portfolio) and Steven Cohen (Trades, Portfolio) initiated new positions in the stock with 15,790 and 179,700 shares, respectively. Other investors like Ray Dalio (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio) have added this stock to their portfolios in the first quarter of 2015.
Disclosure: Omar Venerio holds no position in any stocks mentioned
This article first appeared on GuruFocus.
