ModernGraham Valuation: Adobe Systems Inc (ADBE)

moneyCompany Profile (obtained from Google Finance): Adobe Systems Incorporated (Adobe) is a diversified software company. The Company offers a line of software and services used by professionals, marketers, knowledge workers, application developers, enterprises and consumers for creating, managing, delivering, measuring and engaging with content and experiences across multiple operating systems, devices and media. The Company markets and licenses its software directly to enterprise customers through its sales force and to end users through application stores and its Website at Adobe also distributes its products through a network of distributors, value-added resellers (VARs), systems integrators, independent software vendors (ISVs), retailers and original equipment manufacturers (OEMs). In May 2013, Adobe Systems Inc acquired Ideacodes LLC. In July 2013, Adobe Systems Inc announced the completion of acquisition of privately held Neolane.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  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 – PASS
  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 – PASS
  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 = 4/5

  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 – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $14.57
MG Opinion Overvalued
Value Based on 3% Growth $17.75
Value Based on 0% Growth $10.40
Market Implied Growth Rate 18.35%
Net Current Asset Value (NCAV) $0.97
PEmg 45.20
Current Ratio 2.92
PB Ratio 4.06

Balance Sheet – 8/30/2013 

Current Assets $3,886,100,000
Current Liabilities $1,329,100,000
Total Debt $1,502,400,000
Total Assets $10,234,200,000
Intangible Assets $5,390,300,000
Total Liabilities $3,399,400,000
Outstanding Shares 501,810,000

Earnings Per Share

2013 (estimate) $0.62
2012 $1.66
2011 $1.65
2010 $1.47
2009 $0.73
2008 $1.59
2007 $1.21
2006 $0.83
2005 $1.19
2004 $0.91
2003 $0.55
2002 $0.39

Earnings Per Share – Modern Graham 

2013 (estimate) $1.22
2012 $1.49
2011 $1.38
2010 $1.22
2009 $1.10
2008 $1.24


Adobe Systems Inc. disappoints the Enterprising Investor by having lackluster growth.  The company does not qualify for the Defensive Investor by not having a strong dividend history, and trading at very high PEmg and PB ratios.  The company does pass the requirements for the Enterprising Investor, but the company disappoints from a valuation perspective.  Adobe’s EPSmg (normalized earnings) have failed to substantially grow during the recent historical period, and in fact have dropped from $1.24 in 2008 to an estimated $1.22 for 2013.  Compared to similar companies such as Microsoft (MSFT), International Business Machines (IBM), and especially Apple (AAPL), it is surprising Adobe has not been able to achieve at least some growth.  This failure to grow earnings negatively affects the ModernGraham valuation model’s results for Adobe, and the company appears to be overvalued at the current time.  The market’s implied growth rate of 18.35% is in no way supported by the historical data, and Enterprising Investors should be very careful when considering this company for their individual portfolios.

What do you think?  Do you agree that Adobe Systems Inc. is overvalued?  Is the company suitable only for Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Adobe Systems Inc. at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill





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