Is Another Adobe Buying Opportunity Approaching?

| About: Adobe Systems (ADBE)

Here we go again. Almost exactly one year ago I fretted over comments regarding Adobe’s (NASDAQ:ADBE) expected earnings. At the time, analysts were betting the company would lower guidance. At the time I said “the company may lower guidance, but since investors already expect it the shares may not go down or could even rise.” I backed up my words by buying call options, a trade that worked very well for me.

Analysts Expect Strong 2Q for Adobe

BY THE NUMBERS: In March, Adobe projected second-quarter sales of $700 million to $740 million, earnings of 23 cents to 26 cents per share, adjusted income of 34 cents to 36 cents per share, and an operating margin of about 23 percent to 25 percent.Analysts polled by Thomson Financial think Adobe will earn 35 cents per share on sales of $728.8 million.

ANALYST TAKE: In a note to clients last week, Wachovia Securities analyst Philip Rueppel wrote that after talking with resellers and looking at data, he thinks sales of Adobe’s Creative Suite 3 and Acrobat 8 software will push the company’s second-quarter results above his estimates of 37 cents per share in earnings and $735.9 million in revenue.

Rueppel rates the stock “Outperform.”

Deutsche Bank analyst Tom Ernst Jr. raised his estimates for Adobe’s second quarter and fiscal 2007 in a June 3 note, writing he thinks Creative Suite 3 is “off to a fast start.”

Comments like those tend to worry me, because the better investors think things are the easier it will be to disappoint them. I have been neutral since December, feeling that the Creative Suite product cycle could lead to a “what next” attitude among investors, who will exit until they see the next product cycle on the horizon. While the stock has not fallen much yet, it also has not performed any better than the average stock during the last six months.


The high current expectations may be the catalyst I need for my prediction to come true, which in turn would hopefully create an opportunity for me to buy the stock again. My ideal entry point would be $37.50, but anything below $40 might be interesting given the current earnings estimates.