Adobe product launch could spark rally in stock

By Jim Finkle – Analysis

BOSTON (BestGrowthStock) – Adobe Systems Inc (ADBE.O: ) shares may be poised to rally as the company gears up for its biggest product launch in at least three years, the release of its flagship Creative Suite line of design software.

Dubbed CS5, analysts and industry executives said on Friday, it has the makings of a hit, which Adobe needs after its predecessor CS4 received lukewarm reviews. CS4 was released in 2008, during the depth of the recession.

Investors are closely watching the launch because the software line is Adobe’s biggest, pulling in $1.7 billion in sales in its most-recent fiscal year and accounting for about 58 percent of revenue.

“We’re bullish on the cycle and even more so on the stock,” said Brad Zelnick, an analyst with Macquarie Securities.

The maker of Photoshop, Illustrator and Flash on Monday will unveil the Creative Suite 5 collection of more than a dozen programs for editing photos, videos and sound, creating interactive websites and designing print publications. They go on sale sometime within the next month.

Wall Street has gotten increasingly optimistic on the stock as the launch has approached and the company has leaked information about its functions.

Three months ago, 13 analysts recommended buying Adobe shares; currently 20 have buy recommendations. The 29 analysts who cover Adobe on average expect the stock price will rise 18 percent over the coming year to $41.46, according to Thomson Reuters StarMine on Friday.

Adobe shares trade at a premium when compared with other large software makers. They are trading at about 17 times the average forecast for next year’s earnings per share, compared with about 13 for Microsoft Corp (MSFT.O: ), 14 for Oracle Corp (ORCL.O: ) and 11 for Symantec Corp (SYMC.O: ).

Some of that optimism is fueled by surveys of creative professionals who say they are eager to buy.

“It’s setting up to be a stronger cycle than the Street is generally anticipating,” said Mike Olson, an analyst with Piper Jaffray. His firm found that customers expect to spend 19 percent more on Adobe software this year than in 2009.

HOLDING ON TIGHT

Janney Montgomery Scott analyst Sasa Zorovic expects Adobe to beat analysts’ earnings estimates and raise forecasts over the coming quarters as sales of the software hit the bottom line.

“I’m telling clients to be comfortable holding this thing into the low 40s,” he said.

Darren Namaye, creative director for New York design firm Ideas on Purpose, plans to equip his company’s 10 workstations with suites of the new software shortly after it is released.

“My IT guy says CS5 looks fantastic, that the buzz is great,” says Namaye, whose company did not buy CS4 because it lacked enough must-have features to justify the expense.

One of the hundreds of enhancements in CS5 that has gotten attention is a feature in Photoshop dubbed “content aware fill” that Adobe showed off in a YouTube video. An editor deletes a tree from a photo; the computer automatically fills in the background with sky that matches the rest of the skyline. It could take several hours to fill in that skyline using existing technology.

Adobe has added a new program to the Creative Suite lineup, Flash Catalyst, which helps designers develop interactive Web sites without requiring them to know computer code. Adobe also rewrote the engine that runs its video editing program to make it more efficient in handling high-definition video.

“CS5 is going to take off big time. There are some amazing things this time around that are really going to spark some interest,” said Steve Dolan, an independent software instructor who has received intensive training in CS5 from Adobe.

Rob Huddleston, an independent Adobe instructor in Sacramento, Calif., who has worked with beta versions of the new software, expects many existing Creative Suite users will upgrade after they see the new features list.

“There are always going to be companies that simply cannot afford it, but if you are using these products every day and there is some feature being introduced into them, you just have to find a way,” he said.

Adobe stock closed up 53 cents to $35.47 on Friday.

None of the analysts quoted for this story own shares in Adobe.

(Editing by Edwin Chan, editing by Gerald E. McCormick and Carol Bishopric)

Adobe product launch could spark rally in stock