USBPJ reiterated Strong Buy on ADBE
Checks Indicate Magazine Ad Rev Up 5%-8% Y/Y In October
Gene Munster, Sr Research Analyst, 612-303-6452, gmunster@pjc.com
• Ad Spending Checks. Field checks we have conducted in the last several days indicate that magazine advertisement spending may have been up between 5%-8% in the month of October on a year/year basis. Typically, the Magazine Publishers of America (MPA) releases information regarding monthly magazine ad trends around the tenth of the month, we would therefore expect the MPA to release its data for the month of October within the next couple of days.
• What Does Magazine Ad Spending Have To Do With Adobe? Many of Adobe's products are used in the design and layout of magazine and other print advertisements. Key products used for these projects include: PageMaker, InDesign, Photoshop, and Illustrator.
• Magazine Ad Revenue A Leading Indicator For Adobe Overall Revenue. Magazine ad spending has historically been a directional indicator for Adobe overall revenue with a one-quarter lag. Specifically, over the last 18 quarters the y/y change in magazine ad spending has indicated whether Adobe's overall y/y change in revenue in the following quarter will be positive or negative.
• Nov Quarter. Given the magnitude of the current upgrade cycle, it is a foregone conclusion, in our minds, that Nov will be a strong qtr. In addition, August qtr magazine ad data indicates whether we will see a positive or negative y/y revenue change in Adobe's Nov quarter (given the one quarter lag). The months of June, July, and Aug were all positive, with ad rev up 8.5%, 7.9%, and 8.9% y/y, respectively. These numbers are in-line with positive Nov quarter Street expectations of up 17% y/y.
• Feb Quarter. Nov quarter magazine ad data indicates whether we will see a positive or negative y/y revenue change in Adobe's Feb quarter (given the one quarter lag). In the month of September the MPA reported y/y growth of 6.3%, and a positive comp in Oct, while expected, continues a step in the right direction for the Feb quarter. Street expectations for the Feb quarter are for up 17% y/y.
• Bottom Line On ADBE. We believe, given the magnitude and timing of the current product cycle, that Adobe will exceed expectations for the Nov qtr (Street at $0.32 on $343.1 mil). Additionally, we expect shipments of localized versions of the upgraded products and new Creative Suite will benefit Adobe's Feb qtr. Given the magnitude of this product launch, we believe shares of ADBE will trend higher to our $50 price target (45x FY04 EPS of $1.11) by the time the Company reports results for the Nov qtr (mid-Dec).
Key risks include, but are not limited to, timing of products, overall health of the graphics market, and unforeseen changes in Mac and PC computing platforms. |
