At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best ...
What do you do when one of the best stockpickers in the business suddenly upgrades one of your own favorite stocks -- one you sold long ago, after booking sizeable gains? Personally, I listen up. And from what I hear, Standpoint Research thinks it's finally safe to own Adobe
Early last year, I highlighted Adobe Systems as one of the very best bargains on the market. (If I recall correctly, my precise words were: "Bargains like this one come along only a few times in a decade.") Behaving cooperatively, the stock proceeded to zoom 66% in value, outpacing the market's returns by a good 38 percentage points before I finally cashed in my virtual winnings in September 2009. Now, according to Standpoint, it's time to hit the reset button and start winning once more.
Adobe shares have dived 28% this year, "including 15% in the last week." That's in large part thanks to a recent Flash conflict with Apple
"And otherwise?"
Right. Standpoint also notes that the stock "is now trading at 2003 levels adjusted for inflation even though EPS is 4X what it was back then." To the downside, the analyst argues that Adobe's plan to buy back as many as 11% of its shares outstanding will support the stock price. Meanwhile, on the upside, Standpoint foresees revenue growth of "25% over the next 24-36 months and ... EPS will rise by a faster pace."
Sounds great. Are they right?
If past performance is any indication of future success, then yes, Standpoint very likely may be right about this one. Ranking in the top 5% of analysts we track on CAPS, Standpoint is in fact usually right about its stock picks.
And yet, while the analyst's technically correct about the stock's price and its earnings, investors may still question whether Adobe can really be a "buy" at nearly 38 times reported earnings. That's more than twice the valuation on Oracle
One word: Yes
As in, yes, Standpoint has jumped the gun on this one. Now, don't get me wrong. Adobe is starting to get attractive in price -- but it's not there yet.
Leaving aside the obviously too-high P/E, and focusing instead on the more generous, and to my Foolish eye more important, free cash flow multiple, we find Adobe generated $832 million in free cash flow over the past 12 months. At today's price, the shares Adobe trade for a not-unreasonable price-to-free cash flow-ratio of less than 17 times. Relative to the 17.1% long-term growth rate that the consensus seems to be projecting for the stock, this makes for a good entry point -- but not a great one. Certainly not as great as the 7.5 times valuation we had on the stock when it was expected to grow at 16% annually for five years around about this time, last year.
Foolish takeaway
To become a truly great value, we're going to need to see Adobe execute absolutely perfectly, and live up to the 25%-plus growth rates that Standpoint forecasts. Problem is, that will require the company to "beat earnings" growth estimates by margins of roughly 50% going forward -- which seems to me a bit much to ask of a company that's only managed to beat by a penny or three over the past four quarters.
With Apple's intransigence continuing to crimp growth rates at Adobe, I'm just not sure they can pull that off. My advice: Keep your powder, and your mud, dry on this one. Wait for better prices before attempting to move into Adobe.
The way this market is moving, you just might get 'em.
