Adobe Systems Inc. $36 - Nasdaq symbol ADBE

ADOBE SYSTEMS INC. $36 (Nasdaq symbol ADBE; WSSF Rating: Average) makes software that helps users create electronic documents. Its main product is Acrobat, which let users convert documents to the popular PDF format. In December 2005, Adobe merged with Macromedia Inc. in an all-stock transaction valued at $3.4 billion. Macromedia’s main product is Flash, which lets Internet web page creators add animation and other features that make their sites easier to use. Like Acrobat, Flash is an industry standard. In Adobe’s first fiscal quarter ended March 3, 2006, it earned $0.32 a share (total $197.5 million) before restructuring and other unusual costs, up 23.1% from $0.26 a share ($133.8 million) a year earlier. Revenue grew 38.6%, to $655.5 million from $472.9 million. Adobe feels that Macromedia’s products will help it develop new applications for PDF documents. It just released a new version of Acrobat that lets engineers and designers easily manipulate and embed 3D drawings into PDF documents. Adobe is also working on ways to combine Flash and Acrobat on mobile phones and handheld computers. The stock got as high as $41 after the merger, but is now back to pre-merger levels. Adobe will probably earn $1.29 before non-recurring items in fiscal 2006, and the stock trades at 27.9 times that figure. It’s also expensive at 8.9 times its revenue of $4.05 a share. The merger should help Adobe improve its share of the fast-growing web page design market. But the stock will likely make little progress until Adobe fully integrates these new operations. Adobe also quit paying dividends last year. Consequently, we have cut its WSSF Rating, from “Above average” to “Average”. Adobe is a hold for aggressive investors.

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