Q4 Preview $ADBE

by Dan December 13, 2012 10:32 am • Commentary

Event: ADBE reports fiscal Q4 earnings tonight after the close, the options market is implying about a 5.5% move post earnings which is rich to the 3 qtr avg move of about 4.5%.  

Sentiment:  Wall Street analysts are fairly mixed on the stock with 11 Buys, 12 Holds and 2 Sells, with an avg 12 month price target of about $35 (below where stock is currently trading).    Short interest sits at 3.5% of the float.

Price Action / Technicals: While the stock is up about 28% ytd, enjoying its best performance since 2009, almost half of these gains have come in the last month as the stock is now making new 52 week highs and approaching a break-out at 2 year highs.

[caption id="attachment_20536" align="aligncenter" width="490" caption="ADBE 2 yr chart from Bloomberg"][/caption]


The lack of volume on the recent run is a bit of cause for concern, but price action always matters most.  The entirety of the rise in the stock this year has been due to an expanding multiple, as earnings is flat in 2012 vs. 2011, and projected to grow 2% next year.  Here is the 5 year chart of the P/E ratio:



The P/E around 22 is not high historically, but it might be high given current growth prospects.

Volatility:  ADBE implied vol is relatively low compared to its average implied vol heading into an earnings event in the recent past.  Here is a 2 year chart of 30 day implied vol (red) vs. 30 day realized vol (blue):



Previous earnings dates are marked with a blue “E” box, which show that the current 30 day implied volatility is relatively low.  But a large reason for that is the low recent realized volatility, shown by the blue line.  Despite that low realized volatility and low 30 day implied volatility though, the market is implying a larger than average earnings move (5.5% vs. 4.5% average).  As a result, selling the earnings move seems to make a lot of sense.

Expectations:  Here is the table of Q4 consensus expectations, along with expectations for Q1 2013 (to compare to guidance) and 2013 as a whole.

eps sales op marg
Q4 0.56          1.1b 35.4
Q1 0.57        1.07b 36.2
FY13 2.36        4.48b 35.5

For Q4 the company guided on their last earnings call in Sept, EPS from .53 to .58, and Sales from$1.075b to $1.125b

My View:  ADBE is in the process of transitioning from a pure licensing model for some of their core products to a subscription model that they call Creative Cloud.  As customers have begun to adopt this new model over the last couple quarters, the company has been able to demonstrate better than expected results for subscriptions, but some bears in the name remain cautious on the impact of their Digital Media segment that accounts for almost 75% of their overall revenue.

My sense would be that the macro headwinds in the quarter, and the generally weak trends in their media and advertising end markets that a beat and raise is probably unlikely, but if so, and just modest, the news is probably in the stock at 2 yr highs .

We are looking at a few different trades, will most likely settle on a Dec/Jan Put Calendar.  Stay Tuned. We will post after we decide on the trade.