RealMoney Silver - Adobe's Shares Shoot Higher

Adobe's Shares Shoot Higher
By Ivy Lessner
TheStreet.com Staff Reporter
3/19/2008 4:16 PM EDT

Updated from 2:30 p.m. EDT

SAN FRANCISCO -- A spate of lower price targets Wednesday didn't put a crimp in shares of Adobe (ADBE) .

After a strong earnings report Tuesday, the company was hit by conflicting messages from sell-side analysts. Although several revised upward their earnings estimates for the San Jose, Calif., software maker, many also lowered their one-year price targets.

Investors preferred to focus on the higher EPS expectations, driving the stock up $4.02, or 12.6%, to $35.90 in recent trading.

Adobe, which makes document and creative software products, boosted profit 52% year over year during the most recent quarter and raised EPS guidance to a range of 4 cents to 10 cents above analysts' consensus estimate. The company is targeting full-year EPS, excluding items, of $1.86 to $1.92.

But apparent concern over a faltering economy and pressure on price-to-earnings ratios prompted analysts to take a more cautious outlook in Wednesday notes.

RBC Capital Markets lowered its price target to $43, from $50, while maintaining an outperform rating on the stock, according to Briefing.com. And UBS lowered its target to $35 from $40.

"Our checks continue to underscore that sales of creative products have started slowing each month [after] a very strong December, something which has continued thus far in March," UBS analyst Heather Bellini wrote. Adobe is an investment banking client of UBS.

"Given the deceleration in top- and bottom-line growth this fiscal year and operating margins that are already best in class, we believe the shares run the risk of continued multiple compression," Bellini wrote.

Shares were trading Wednesday at approximately 19 times 2008 EPS and 17 times 2009 earnings. In early November, shares traded at about 26 times 2008 earnings.

Robert W. Baird analyst Steven Ashley also lowered his price target to $45 from $51, "due to the overall multiple compression" in the market.

"Adobe aggressively accelerated its share repurchase at an average price of $37.50 a share, suggesting management viewed the valuation as compelling at levels 18% above yesterday's close," Ashley wrote. Baird makes a market in Adobe.

The median one-year target price remains unchanged at $46, according to Thomson Financial.

The company's repurchase of 33 million shares during the quarter provided half of Adobe's 3 cents of EPS upside Tuesday, while revenue and some margin improvement accounted for the rest, JPMorgan analysts wrote in a note. Adobe is an investment banking client.

The lone target price rise came from Jefferies analyst Ross MacMillan, who raised his bearish target to $31, from $30. Although Adobe's performance has been stronger than he expected, "we think there is still revenue risk, especially if regions other than North America weaken," he wrote. Jefferies makes a market in Adobe shares.

Know What You Own: Adobe operates in the application software industry, and some of the other stocks in its field include Apple (AAPL) , Microsoft (MSFT) , Oracle (ORCL) and CA (CA) . These stocks closed at ($130.89, -1.45%), ($29.14, -0.95%), ($19.81, -1.05%) and ($22.37, -0.31%) respectively. For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.