ADBE Stock Study (1-12-23)

I recently did a stock study on Adobe Inc. (ADBE) with a closing price of $342.93.

This large-sized company has grown sales and EPS at annualized rates of 17.9% and 44.5% per year since 2013. Historical sales and earnings are up, mostly straight, and parallel with the exception of a slight EPS dip in 2014 and flat EPS from 2020-2022. PTPM averages 32.5% for the last five years while being above the industry average since 2016 and roughly on par with its peer (stated as VMW, MSFT, and SQ) average since 2017. Over the same time period, ROE averages 33.4%.

Debt to capital averages 26.8% over the last five years, which is far below peer and industry averages. Interest Coverage is exemplary at 54 with a 5-year average of 34.

According to CFRA:

     > Adobe (ADBE) is the largest provider of applications used to produce visual content, best known
     > for its Creative Cloud apps, Photoshop (#1 in photo editing, raster graphics), Illustrator (#1
     > in drawing, vector graphics), InDesign (#1 in page layout), and Premiere Pro (#1 in video
     > editing). Its apps are used by graphic designers, photographers, publishers, video producers,
     > animators, and other creative professionals… ADBE’s apps are also used by students, hobbyists,
     > and part-time artists.

With regard to sales growth, CNN Business projects 9.1% for 2023 and 10.8% per year for ’22-’24 (based on 32 analysts). YF projects 9.4% YOY and 12.1% YOY for ’23 and ’24, respectively (28). Zacks projects 9% YOY and 11.1% YOY for ’23 and ’24, respectively (11). Value Line projects 15.5% per year from ’21-’26. Morningstar offers a 2-year ACE estimate of 12.1% per year. CFRA projects 11.4% for ’23 and 11.7% per year for ’22-’24.

Based on all this, I estimate long-term sales with a growth rate of 11%.

With regard to EPS growth, CNN Business reports ACE of 11.5% YOY and 13% per year for ’23 and ’22-’24, respectively (32 analysts). MarketWatch projects 13.3% and 13.4% per year from ’22-’24 and ’22-’25, respectively. Nasdaq.com projects 13.9% YOY and 12.3% per year for ’24 and ’23-’25, respectively (11, 10, and 1 analyst for ’23, ’24, and ’25). YF projects 11.7% for 2023, 14.6% for 2024, and 13.6% per year for the next five years. Zacks projects 11% for 2023, 13.7% for 2024, and 13.2% per year for the next five years (28). Value Line projects 13.7% per year from ’21-’26. M* has long-term ACE at 14.1% per year and 11% per year from its analyst. CFRA provides a 3-year projection of 13% per year.

Based on all this, I estimate long-term earnings with a growth rate of 11%.

High P/E has ranged from 47.9 (2016) to 140 (2014) over the last 10 years. The last five years have averaged 58.4. I project a long-term High P/E of 47.

Low P/E has ranged from 23.6 (2020) to 101.8 (upside outlier in 2014). The last five years have averaged 31.8. I project a long-term Low P/E of 23.

I am sticking with the default long-term projected low price of $232.30, which is 32% below the previous closing price.

All this results in an U/D ratio of 4.1, which puts ADBE in the Buy zone. CAR (using forecast High P/E) is 23.6% and PAR (using forecast average P/E) is 11.7%.

In order to assess margin of safety, I look to Member Sentiment. Averages of 662 studies over the past 90 days indicate projected sales, EPS, High P/E, and Low P/E of 13.1%, 13.1%, 42.4, and 29.4, respectively. My growth rate estimates are lower and although my projected High P/E (47) is higher, my average P/E (35) is slightly lower than Member Sentiment (35.9) and Value Line (36). Although of questionable importance due to unknown correlation with other inputs, my projected low price of $232.30 is much lower than the average projected low price of $261.45. This could bias my study toward Sell.

A margin of safety gives me added confidence that the company can outperform relatively conservative inputs.