More than anything else, managers determine returns. They set strategy, hire key team members, oversee operations, and cash paychecks. Every move they make either enhances or destroys shareholder capital.
It pays to know who these men and women are, how they're paid, whether they, too, are owners, and how they perform versus competitors in certain key metrics. In this regular column, I'll examine all that and more with the goal of enhancing our understanding of some of the top stocks in Fooldom.
Next up: Adobe Systems
Foolish facts
|
Metric |
Adobe Systems |
|---|---|
| CAPS stars (out of 5) | *** |
| Total ratings | 1,986 |
| Percent bulls | 94.9% |
| Percent bears | 5.1% |
| Bullish pitches | 325 out of 344 |
| Highest rated peers | SinoHub, Ansys, Tyler Technologies |
Data current as of March 20.
Adobe is a lightning-rod stock. Some Fools love it. Others hate it. What no one disputes is the size and quality of Adobe's historic software franchises. Stop me if you've heard these names before:
- Photoshop
- Acrobat
- Illustrator
- Reader
- PageMaker
- Flash
Bullish investors love this list. They love that creatives and web developers take to Adobe's tools like a moths to a lamplight. The company's massive installed base is what helps it to consistently throw off more than $1 billion in cash from operations annually.
Even so, detractors will tell you that Adobe's web-based technology is inefficient. I know what they mean. Consider AIR. Running Graphic.ly's comic book reader in my Chrome browser creates virtually zero strain on my Mac. Not so with the AIR version.
Even with the Meebo IM client and my Google apps open, Chrome with Graphic.ly accounts for less than 10% of my Mac's processing workload. By contrast, the AIR-based version accounts for more than 20% routinely. And that's low compared to my experience with AIR-based social media platforms, such as TweetDeck.
Developers and users aren't the only ones frustrated with Adobe, and more specifically, Flash. Partners are, too. Apple
Management overview
|
Executive |
Years |
Cash Compensation |
Shares Owned* |
|---|---|---|---|
| John Warnock, Co-Founder and Co-Chairman | 29 | $100,000 | 1,140,821 |
| Charles Geschke, Co-Founder and Co-Chairman | 29 | $100,000 | 224,500 |
| Shantanu Narayen, President and CEO | 13 | $3,069,842 | 204,818 |
| Mark Garrett, Chief Financial Officer | 4 | $1,599,758 | 57,384 |
Source: Capital IQ, a division of Standard & Poor's. (Data current as of March 14.)
* Includes shares set aside for the Geschke and Warnock family trusts
If you have to go head-to-head with some of the largest companies in tech, it's best to do so with managers who are experienced and which have plenty to lose if business turns sour. Adobe has plenty of experience, yet insider ownership interests have dwindled.
Form 4 Oracle reports that Adobe executives and board members have sold nearly $5 million worth of stock on the open market over the past year. CEO Narayen was the most recent seller. His family trust cashed in more than 66,000 shares in January, collecting $2.2 million in proceeds.
But as the table above shows, stock sales aren't where Narayen makes his money. His millions in salary and bonus guarantee him a comfortable living, regardless of what happens to the stock. Not exactly the arrangement I'd want as an investor.
Management analysis versus competitors
|
Company |
Insider Ownership |
Gross Margin |
ROC* |
ROE** |
|---|---|---|---|---|
| Adobe Systems | 0.45% | 89.4% | 10.1% | 15.4% |
| Apple | 0.70% | 38.8% | 29.7% | 36.8% |
| Microsoft | 4.04% | 79.2% | 31.1% | 44.3% |
|
Nuance Comms. |
1.05% | 67% | 1.6% | (0.7%) |
Source: Capital IQ, a division of Standard & Poor's. (Data current as of March 14.)
* Return on capital.
** Return on equity.
Perhaps the worst part of the Adobe story is how it compares to Microsoft. Both companies have significant, long-lasting software franchises. Both have high gross margins. Both feature tenured management. And yet Mr. Softy produces sharply higher returns on capital and equity than its smaller peer.
Were you to force me to choose between the two, I'd take Microsoft. But it probably says more that I already own shares of Apple and Google while I've avoided Adobe and Microsoft. I'd rather bet on the two businesses most responsible for the cloud-driven mobile computing era we're entering into.
Do you agree? Disagree? Let us know what you think about Adobe's products, strategy, and valuation using the comments box below. You can also rate Adobe in Motley Fool CAPS. Finally, don't forget to keep tabs on Adobe Systems by adding the stock to Your Watchlist for free, personalized stock tracking.
- Add Adobe to My Watchlist.
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