Adobe Systems Inc. (ADBE)
Industry: Application Software
Adobe Systems Incorporated operates as a diversified software company in the Americas, Europe, the Middle East, Africa, and Asia. It offers a line of creative, business, Web, and mobile software and services used by creative professionals, knowledge workers, consumers, original equipment manufacturers, developers, and enterprises. The company's Creative Solutions segment focuses on solutions for professional publishing, Web design and development, professional photography, video production, animation and motion graphic production, and printing visually rich information.
How well is the Stock Growing?
Adobe has not done very well this year (see Q2 earnings call transcript here). Year over year they were fairly close to the industry sales figures. Where they came in at 9.2% for the year, the industry was 10.4% so they were close. It is the “Net Income” that has us worried. Net income is what is left over after subtracting expenses & losses. The Application Software Industry Net Income for the last year averaged 24.70% but ADBE is a frightening 18.70% in the red. This means that they have some high expenses and/or losses this last year.
How valuable is the Stock?
Cash is King. If this is the case, NOV has what it takes to blossom as an investment. When we think about value we have to think about the potential growth. How much potential? Something called the price to sales ratio gives us the best indicator of this. The more money a company has coming in through sales compared to how much working capital it has speaks volume of its health. The lower the price/sales ratio, the healthier it is. ADBE is respectable here. They don’t lead the industry, but they are not far behind. They come in with a ratio of 5.71 while the industry is 4.82. So, not stellar but close to average.
We are very concerned about the next ratio we consider important. How much money is flowing through this company as compared to its price. This is called the price to cash flow ratio. The closer the ratio gets to that magical “100” the less capability a company has. “100” means it can just pay its bills because the value of the company is equal to the amount of money coming in and no more. The industry stands at 16.40 while ADBE announces a highly bloated 27.00. This is showing ADBE still cannot seem to save its money as well as the rest of the industry. Since we compare companies to their industry to define their health there are two more ratios that we consider. The price to earnings ratio (P/E Ratio) also needs to be lower to show value, but it is blisteringly high. (48.70 for ADBE and the industry is 22.70.) Our conclusion - this is not a value at all right now. We give it an “D”.
How profitable is the Company?
If a company has a good sales force and the money is flowing, that is a possible good sign for an investment. But alone, this is not good. What if a company brings in money but then spends it as fast as it brings it in? What if it costs them almost as much to make a sale as it does to sell? These are important things to think about and know if you are going to put your money into a company. To know things like this, I would ask the question: “How much money is left over from a sale after you pay all your costs to make that sale?” This is called the gross margin. Comparing the industry to ADBE, the industry comes in at 77%, so for every dollar sold, 38.1 cents is left over. It costs the industry 61.9 cents to make one dollar. ADBE’s gross margin is 89.8%. This shows promise until we look at the Net Profit Margin. “How good is the company at controlling its costs?” This is sometimes referred to as the net profit margin. If we divide the net profit by net revenues we come up with a %. The higher the % the better at money management the company is. The industry’s net profit margin is 22.3%. So, for every dollar they make (after taxes) their REAL profit is 22.3 cents. ADBE comes in at an embarrassing 11.8% They are showing their high expense ratios again here. We are not very happy with what we are seeing here. Our Conclusion - this company is not really profitable right now. We give it an “C-”.
Can the Company Pay its Debts?
With the financial collapse in 2008 of the markets and all the companies that would have gone under because they could not pay off their debt, we like to know how strong a company is before we are willing to invest our money in it. “Here Today, Gone Tomorrow” is not something we think wise. We like ARCC here. The first question we would ask any company is how much debt has you accumulated as compared to the amount of money and/or property you own? This is known as the debt/equity ratio. If a company has potential for growth it will have a lot more cash than it would debt. The industry ratio is .25 ADBE is about equal here coming in at .29, so not much to chat about, average. Two things we do like about ADBE. They have the ability to get liquid far faster than the industry as a whole. If they needed to meet their short term debt obligations quickly (this is known as their current ratio), they come in at a 3.50% while the industry is only 2.00%, and they are much more solvent. Their quick ratio, which shows signs of a companies abilities to meet its obligations also is much better. ADBE is 3.50% while the industry is 1.9% Our Conclusion- this company can handle its debts. We give it an “B”.
Long term it seems that ADBE is in a nice downward movement.
Since the beginning of the year they have endured a 20.7% loss in value and we are not yet convinced that they are ready to turn things around.
This is not a stock we would be ready to invest in.
Disclosure: No position