Fab Tech:
I use kind of a crude method, mostly because it's easy to calculate and all the data's readily accessible: I try not to pay a higher PE than the company's long-term projected growth rate (realizing, of course, that analysts are usually wrong). I'm willing to factor in a premium for a great economy, like we have currently, and for companies that consistently produce earnings surprises, like MSFT, DELL or LU (but not to the extent granted by this market).
ADBE is expected to increase earnings by 20% over the next five years, according to the two analysts issuing long-term growth projections (First Call), so I'd be willing to pay a 20 PE for the company. The problem is, how much is it going to miss published estimates by in the next couple of quarters? The company is expected to earn $2.43 for fiscal year 1998 (November), but we already know it's going to miss that number by at least 11 cents, so I think at best we can hope for $2.30 or so this year. At $46 or so, that makes the stock fully valued -- assuming the company can meet its numbers the rest of the year. As they missed their quarter by 25%, I don't see why the stock should be fully valued, and it will probably become overvalued as earnings projections come down. In the past, the market would have taken out a 20% or so discount based on that miss, but who knows? Maybe the analysts saw something in the report that I didn't, just like they did with COMS. I think ADBE would be fairly valued in the mid-high 30s, but as I said before, I use kind of a crude method, and those who know the company better may see something I don't. They certainly have some good products -- I work for a publishing company, and my production department swears by Adobe products. But I've also seen an awful lot of companies with great products that didn't have the business sense to capitlize on them.
That said, I'm willing to listen to anyone else on this subject. Good luck to all.
Paul |
