Adobe designs creative strategy

6/2/2008


  Recent Price
$42
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
29
  Shares (millions)
571
  Long-Term Debt as % of Capital
11%
  52-Week Price Range
$48.47 - $30.70

There’s more to Adobe Systems ($42; NASDAQ: ADBE) than the PDF.

While the ubiquitous electronic document format may be the most visible face of the company, millions of customers license Adobe software that creates electronic documents (PDFs), Web sites, online videos, and an array of other print and Internet communication tools. Adobe makes software to serve not only creative professionals such as publishers and film editors — who have specialized art needs — but anyone needing to create business documents and presentations.

Adobe is well-positioned to capitalize on the growth of online video and publishing, as well as the burgeoning demand for multimedia mobile devices. Most personal computers already use Adobe’s free programs, Flash Player, which plays video through Internet browsers, and Acrobat Reader, which reads PDFs. With a new suite of products set to launch later this year, Adobe should see strong demand. Adobe is a Buy and a Long-Term Buy.

Becoming the standard
Adobe’s secret is to create a format that works with different computing systems, then aggressively promote that format as a standard. For example, users of Microsoft ($28; NASDAQ: MSFT) Windows, Apple’s ($186; NASDAQ: AAPL) Macintosh operating system, and the various open-source operating systems can read PDFs with ease using a free software program.

Adobe was the first to popularize such a format, and it has become nearly universal in scope. The company generates revenue from software that allows users to create documents in that standard format.

Next target: video. In concert with a group of cell-phone carriers and mobile-device makers, Adobe is promoting Flash as the standard for any computer or handheld device that plays video. The platform has already proved successful, with 52 million Flash video streams available in 2007. More than 95% of online video content uses Flash technology. Roughly 500 million mobile devices already use Flash.

Late this year, Adobe plans to launch Creative Suite 4, the latest upgrade of its premier software bundle. Creative Suite offers six editions targeted to Web, print, and video designers. The company released a version of Creative Suite last year but expects plenty of users to upgrade this year, as more than half of users have older editions of the software. In addition to software bundles, the creative-solutions division (60% of 2007 revenue) sells audio-, video-, and graphics-editing products, the Web developer Dreamweaver, and Flash.

Acrobat drives the business-productivity segment (25% of 2007 revenue). Roughly 30 million customers use Acrobat, which works with Microsoft Office and other software to create PDF documents. An upgrade slated for release later this year will offer video and audio features.

Conclusion
Consensus estimates project per-share-earnings growth of 18% in fiscal 2008 ending November and 12% in 2009. Adobe trades at 22 times estimated year-ahead earnings, well below its three-year average forward P/E ratio of 27. This reasonably valued industry leader seems capable of a move to $50 over the next 12 months. An annual report is available from 345 Park Ave, San Jose, CA, 95110; (408) 536-6000; www.adobe.com.


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