Less than one week after Motley Fool CAPS predicted that Adobe Systems
To the newcomers I offer a hearty: "Welcome aboard." The rest of us, though, are more interested in learning whether the 6% spike in share price that Adobe received in response to its earnings update is all there is to be had -- or if we can expect more good things to come.
My guess: Yes, Adobe is still undervalued. My hunch: Yes, you should still buy it. (And if I can stop writing about the stock long enough to fit a buy order in between the restrictions of the Foolish trading guidelines, I Fool-y intend to do so myself.) Here's why:
Buy the numbers
On Wednesday after trading closed, Adobe issued what can loosely be termed a "revenue warning" (but which was obviously not viewed so by the market). In a nutshell, Adobe advised that while it would miss its own revenue target, the company still plans to rake in about $785 million in first-quarter sales during one of the worst recessions in recorded history.
More important than the sales are the profits Adobe will earn thereon. To wit, management advised that despite missing the low end of previous sales guidance, it should still reach the low end of profits guidance -- $0.30 per share -- as it achieves operating profit margins north of 26%. This will be comparable to the margins Adobe earned in the much better year that was 2007, and better than what rivals IBM
Next quarter will be a bit rougher, as Adobe predicts only $700 million in revenues, versus the previous consensus expectations of $825 million.
With Adobe shares currently trading for less than eight times trailing free cash flow, and analysts still expecting the company to grow its profits at 12% over the long term, my back-of-the-envelope calculations show this stock to be trading at about two-thirds what it's worth today.
Sure, no one likes to see falling sales. But that margin of safety looks mighty wide to me. I'd be a buyer here.
Fool contributor Rich Smith does not (yet) own shares of any company named above, but Microsoft is a Motley Fool Inside Value recommendation, while Apple is a Motley Fool Stock Advisor selection. The Motley Fool has a disclosure policy.