Is Adobe an Outperform?

With shares of Adobe Systems Inc. (NASDAQ:ADBE) trading at around $38.61, is ADBE an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Adobe is now releasing Reflow for the first time. This is a new responsive design tool that is built on HTML and JavaScript. It’s a web-based design service that allows you to resize your screen. Preview one is now available to free and paid subscribers. If you would like a more detailed yet simple explanation, you can watch this short video.

Looking at Adobe away from Reflow, there have been mixed results. Revenue growth, EPS growth, and operating margins are all above industry averages. However, ROE is below the industry average.

The customer base hasn’t been growing at the same pace as it has in the past, but Adobe’s new cloud-based approach should reignite growth.

Let’s take a look at some important numbers prior to forming an opinion on the stock…

E = Equity to Debt Ratio Is Strong        

The debt-to-equity ratio for Adobe is strong, the balance sheet is very healthy, and cash flow is superb. No complaints here.  

Debt-To-Equity

Cash

Long-Term Debt

ADBE

0.23

$3.54 Billion

$1.51 Billion

BCOV

0.00

$29.97 Million

$0

CA

0.27

$2.56 Billion

$1.44 Billion

 

T = Technicals on the Stock Chart Are Mixed

Adobe has underperformed the S&P 500 over the past three years, but it has outperformed CA Technologies (NASDAQ:CA). Brightcove (NASDAQ:BCOV) is a much smaller player, and it has only showed weakness since its IPO. Of these three companies, only CA Technologies offers yield, which is currently 4 percent.

1 Month

Year-To-Date

1 Year

3 Year

ADBE

1.21%

2.49%

19.05%

22.80%

BCOV

-32.05%

-25.66%

N/A

N/A

CA

6.90%

14.58%

-3.89%

23.21%

 

At $38.61, Adode is trading above all its averages.   

50-Day SMA

37.67

100-Day SMA

35.40

200-Day SMA

33.67

 

E = Earnings Have Been Steady              

Earnings and revenue have been steady on an annual basis. However, as you can see, the pace has slowed in both areas.

2008

2009

2010

2011

2012

Revenue ($)in billions

3.58

2.95

3.80

4.22

4.40

Diluted EPS ($)

1.59

0.73

1.47

1.65

1.66

 

When we look at the last quarter on a year-over-year basis, we see flat revenue and a significant improvement in earnings.

11/2011

2/2012

5/2012

8/2012

11/2012

Revenue ($)in billions

1.15

1.05

1.12

1.08

1.15

Diluted EPS ($)

0.35

0.37

0.45

0.40

0.44

 

Let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Trends in the industry are mixed, but mostly positive at the moment. That said, trends are pretty much irrelevant with Adobe. The company has become innovative enough that trends won’t have as much of an impact as they will with other companies in this space.

Conclusion

Adobe has strong margins, good debt management, a healthy balance sheet, a lot of cash flow, quality innovation, consistent growth, and it’s a household name. While there always have been ups and downs, and while there will always continue to be ups and downs, Adobe is a long-term OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.