In my previous post I tried to summarize Adobe's improving fundamentals. Obviously, analysts will need to relook/increase their estimates, but we can probably do as well forecasting it ourselves. Here's my back-of-the-envelope look that suggests Adobe could double in price from its current level within the next 12-18 months:
1. Fourth quarter will also exceed analysts' estimates. During each of the last 3 years, 4th quarter revenue has exceeded 3rd quarter by 10-15%. Seasonally, it's their strongest quarter. Using a conservative estimate of an 11% qtr-to-qtr increase yields a $255MM revenue estimate, 23% above the year-earlier period. Based on recent results, this level of revenue should produce normalized EPS growth of 37% ($.67/share) which would be 29% above the 'old consensus' estimate of $.52/share. Here's how the fiscal '97 comparisons would look:
Feb Rev $227MM +17% Norm. EPS $ .61 +45%
May Rev $228MM +12% Norm. EPS $.57 +27%
Aug Rev $230MM +27% Norm. EPS $.55 + 53%
Nov Rev $255E + 23% Norm. EPS $.67E +37%
Total Rev $940E +20% Norm EPS $2.40E +40%
2. Fiscal '98 should conservatively produce revenue growth of 15%. The momentum is there and the first half comparisons should be very easy. EPS growth should continue to leverage revenue growth before consideration of the share repurchase program. If half of the authorized shares are purchased in the next year, Adobe should achieve 30% EPS growth on 15% revenue growth. Tempering this slightly for fiscal '99, the numbers by year would look as follows:
1995 Rev. $762MM +13% Norm.EPS $1.80 +43%
1996 Rev. $786 + 3% Norm.EPS $1.71 (5)%
1997 $940E +20% , $2.40E +40%
1998 $1080E +15% , $3.12E +30%
1999 $1230E +14% , $4.00E +28%
3. Valuation: given these projections--granted they are back-of-the-envelope, but IMHO as reasonable as any analyst is going to come up with--I would not find it hard to envision Adobe reaching $100/share market valuation within a 12-18 month time frame. This would mean a valuation of roughly 30x trailing EPS or 25x forward EPS. Adobe's market cap would grow from its present $3.6B level to ~$6.5B on the reduced number of shares outstanding. |
