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Saturday, January 19, 2019

Adobe Systems Inc. Analysis – 2015 Update $ADBE


Adobe_Systems_logo_and_wordmark.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – June 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Adobe Systems Inc. (ADBE) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Adobe Systems Incorporated (Adobe) is a software company. The Company offers products and services for professionals, marketers, application developers, enterprises and consumers for creating, managing, delivering, optimizing and engaging with content. Adobe markets and licenses its products and services through app stores and its Website www.adobe.com. The Company’s operates in three segments: Digital Marketing, Digital Media, and Print and Publishing. In Digital Media, the Company is engaged in providing tools, services and solutions that enable to create, publish and promote their content. In Digital Marketing, the Company is engaged in providing solutions and services for creating, managing, executing, measuring and optimizing digital advertising and marketing campaigns. Adobe’s Print and Publishing segment addresses various market opportunities, including eLearning solutions, technical document publishing, Web application development and high-end printing.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – FAIL
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary

Key Data:

Recent Price $78.96
MG Value $6.69
MG Opinion Overvalued
Value Based on 3% Growth $17.95
Value Based on 0% Growth $10.52
Market Implied Growth Rate 27.64%
Net Current Asset Value (NCAV) -$0.88
PEmg 63.78
Current Ratio 2.22
PB Ratio 6.08

Balance Sheet – March 2015

Current Assets $3,972,000,000
Current Liabilities $1,788,000,000
Total Debt $1,902,000,000
Total Assets $11,008,000,000
Intangible Assets $6,025,000,000
Total Liabilities $4,419,000,000
Outstanding Shares 507,500,000

Earnings Per Share

2015 (estimate) $1.96
2014 $0.53
2013 $0.56
2012 $1.66
2011 $1.65
2010 $1.47
2009 $0.73
2008 $1.59
2007 $1.21
2006 $0.83
2005 $1.19

Earnings Per Share – ModernGraham

2015 (estimate) $1.24
2014 $0.98
2013 $1.20
2012 $1.49
2011 $1.38
2010 $1.22

Dividend History
Adobe does not pay a dividend.

Conclusion:

Adobe Systems Inc. is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the insufficient earnings growth over the last ten years, the lack of dividends, and the high PEmg and PB ratios.  The Enterprising Investor is concerned with the lack of earnings growth over the last five years and the lack of dividends.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $1.38 in 2011 to only an estimated $1.24 for 2015.  This level of demonstrated earnings growth does not support the market’s implied estimate of 27.64% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value well below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Adobe Systems Inc. (ADBE)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

 

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2 Responses “Adobe Systems Inc. Analysis – 2015 Update $ADBE”

  1. antonio ramos
    August 26, 2015 at 11:39 am

    can you explain how I reach this number MG Value $6.69?

    • August 26, 2015 at 1:01 pm

      Antonio,

      MG Value is calculated using the ModernGraham valuation formula:

      Value = EPSmg x 8.5+2g

      EPSmg is a weighted average of the last five years of earnings per share. Growth is estimated by averaging the level of growth in EPSmg the company has achieved in the last five years.

      Here, the EPSmg is $1.24, but the EPSmg 5 years ago was $1.38 so the company has seen a decline in its earnings which is not a good result and leads the valuation model to return a value of only $6.69.

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