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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Adobe Systems

October 1st 2010 Adobe Systems
Nasdaq Symbol: ADBE
Industry: Software
Price as of 10/01: $26.27

It's the end of September and the end of the third quarter. The month closed out as the best September for the Dow Jones since 1939. Not bad. The dividend and commodity stocks have performed great of late, but not all stocks or sectors did well in September. The banks and other financials have struggled due to light volume on Wallstreet and tepid loan demand. Hopefully, that will reverse itself in the fourth quarter. A number of techs stocks have provided disappointing earnings or guidance. Intel lowered numbers back in August causing a quick drop in the stock price. The stock has since slowly recovered. This week we'll feature another tech stock that has come under selling pressure following conservative guidance. The featured stock of the week is Adobe Software. Virtually all desktop computers and other mobile devices carry Adobe software providing video and other digital interactions with a high value experience. Approximately 75% of all online videos worldwide are viewed with Adobe Flash technology. The stock dropped 20% back on the 22nd of September when the company missed estimates and provided conservative guidance. The stock has since moved sideways not far from the 52 week low. In the short term the stock could remain under pressure, but long term Adobe remains a great investment.
Two weeks ago, Adobe reported a fiscal third-quarter profit of $230.1 million, or 44 cents a share, compared with a profit of $136 million, or 26 cents a share, for the year-earlier period. Adjusted income was 54 cents a share. Revenue was $990.3 million, up from $697.5 million last year. Analysts had expected the software company to report earnings of 49 cents a share, on revenue of $985.9 million. Breaking down the sales, product revenue came in at $829.1 million, up from $636.5 million in the year-earlier period. Subscription sales totaled $98.6 million, up from $13.3 million, while services revenue was $62.6 million, up from $47.6 million. For the current quarter, the company said it expects revenue of $950 million to $1 billion. Adobe also expects adjusted earnings in the range of 48 cents a share to 54 cents a share. Analysts currently expect Adobe to post adjusted earnings of 53 cents a share, on revenue of $1.03 billion, according to the consensus survey. The earnings miss and conservative guidance was due to weakness in its Creative Solutions division in the U.S. education market, its largest sector, and in all products in Japan, Adobe's largest geographic market outside the U.S. Adobe expects the weakness to continue in the current quarter.
Since the weakness in sales will persist into the fourth quarter, it is hard to see any catalyst for the stock other than valuation. Currently the valuation is becoming much more compelling. Adobe's stock is trading for 13 times 2010 earnings and 12 times next years earnings. The stock also trades for 3 times sales and 2.6 times book value of $9.80 a share. The company has one billion dollars in cash net of debt and continues to churn out free cash flow of hundreds of millions every quarter. All the analysts downgraded Adobe following their earnings miss concerned about the short term, but the analysts also conceded that long term Adobe remains an attractive investment.