Adobe Systems — How to Play Tuesday’s Earnings Report

On Tuesday, software company Adobe Systems (NASDAQ: ADBE ) reports earnings for
the quarter ending Aug. 31, 2011. With shares down nearly 30% since the end of
April, investors are skeptical about the company's performance in the current
quarter. Technology shares in general have stumbled since the beginning of the
summer. Concerns about an economic slowdown and a double-dip recession have
investors questioning future performance at Adobe. When the company reported
results for the period ending May 31, 2011, it included guidance for the current
quarter that was too pessimistic for some. The stock lost 6% of its value the
trading day after that report was released despite the company beating analyst
estimates for the quarter. And that was only the beginning. Since July 1, Adobe
has lost 19% of its value. Has the selling gone too far? It would appear most of
the bad news already is priced into the stock. Adobe said it expected earnings
to fall in a range of 50 to 56 cents per share. Analyst estimates at the time
were at 54 cents per share. The average estimate has not changed since, but
given the reaction in the market, one would expect estimates to be a bit lower.
During the past year, the company has exceeded estimates: For the full year
ending Nov. 30, 2011, the average Wall Street estimate for profits is $2.26 per
share. That number increases by 12% the following year to $2.54 per share. At
current prices, shares of Adobe trade for 11 times current fiscal-year
estimates. Shares of Adobe fell Friday thanks to a rating downgrade by JMP
Securities . The analyst performed a so-called channel check of supposed
customers of the company that suggested sales might be less than expected in the
current period. The analyst cut profit growth forecasts for the current year to
8%. Before the summer swoon, however, Adobe shares actually were performing
nicely: JMPs recent downgrade of the stock is disconcerting. The saving grace
might be its Flash product. The long-running dispute with Apple (NASDAQ: AAPL )
has hurt the perception of the company, but with strong performance by Google
(NASDAQ: GOOG ) Android-based systems as well as an end-around that could let
Flash-based content stream onto iOS-based products that segment of the company
might surprise this quarter. From a technical standpoint, shares of Adobe have
been forming a base of support at $24 per share. From a fundamental standpoint,
shares are reasonably priced. If the news is not as bad as investors currently
selling the stock predict, Adobe might have room to run. Of course, that is a
big if in this environment. I would look to find better money-making
opportunities elsewhere.