Benjamin 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.  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 specific look at how Adobe Systems fares in the ModernGraham valuation model.
Company 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 www.adobe.com. 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, it acquired Ideacodes LLC. In July 2013, the Company announced the completion of acquisition of privately held Neolane.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- 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
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- 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
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – FAIL
- Earnings growth – EPSmg greater than 5 years ago – PASS
Valuation Summary
Key Data:
| Recent Price | $68.06 |
| MG Value | $13.67 |
| MG Opinion | Overvalued |
| Value Based on 3% Growth | $17.46 |
| Value Based on 0% Growth | $10.23 |
| Market Implied Growth Rate | 24.01% |
| Net Current Asset Value (NCAV) | $0.79 |
| PEmg | 56.53 |
| Current Ratio | 2.65 |
| PB Ratio | 5.02 |
Balance Sheet – 11/29/2013
| Current Assets | $4,045,900,000 |
| Current Liabilities | $1,525,600,000 |
| Total Debt | $1,499,300,000 |
| Total Assets | $10,380,300,000 |
| Intangible Assets | $5,377,200,000 |
| Total Liabilities | $3,655,700,000 |
| Outstanding Shares | 496,260,000 |
Earnings Per Share
| 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 |
| 2004 | $0.91 |
| 2003 | $0.55 |
Earnings Per Share – ModernGrahamÂ
| 2013 | $1.20 |
| 2012 | $1.49 |
| 2011 | $1.38 |
| 2010 | $1.22 |
| 2009 | $1.10 |
| 2008 | $1.24 |
Conclusion:
Adobe Systems is not suitable for the Defensive Investor, due to the lack of a dividend payment, insufficient earnings growth over the ten year period, and high PEmg and PB ratios. Â The Enterprising Investor is not quite as picky, though, and the company passes all of the requirements for the investor type other than the dividend payment. Â As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research, including a review of ModernGraham’s valuation of Microsoft Corp (MSFT) and a review of 5 Undervalued Companies for the Enterprising Investor. Â From a valuation standpoint, the company does not appear to be a good value at this time. Â The company’s EPSmg (normalized earnings) have only grown from $1.10 in 2009 to $1.20 for 2013, a very low level of growth that does not support the market’s implied estimate of 24.01% earnings growth. Â Accordingly, the ModernGraham valuation model returns an estimate of intrinsic value that falls well below the market 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.
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: Â The author did not hold a position in Adobe Systems Inc. (ADBE) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.
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