Amy Banse, who sits on the Board of Directors at Adobe Systems Incorporated (NASDAQ:ADBE), bought 5,000 shares of the stock on January 16th at an average price of $38.06. This is the first time Banse has bought shares in the company; she joined the Board in May 2012, however, and so we would expect any “courtesy purchases” of stock upon becoming a Board member to have occurred some time ago.
Insider purchases can be bullish signs (read more about studies on insider trading) as insiders should prefer to diversify rather than increase their exposure to the company, unless they are confident that the market is underestimating the company. We would note, however, that several insiders sold Adobe stock in December; of course, this may have been for diversification or even capital gains reasons (the stock is currently up 26% in the last year). See a history of insider sales at Adobe. Banse also serves as head of Comcast Ventures at Comcast Corporation (NASDAQ:CMSA).
The fourth quarter of Adobe’s fiscal year ended in November, with the company reporting flat revenue from a year earlier; lower product revenue (products are by far the largest source of sales) was offset by strong growth in subscription revenues as well as increases in the services and support business. While cost of goods sold more or less reflected these trends, higher operating expenses caused operating income to decline 10% once we account for restructuring expenses in the third quarter of the last fiscal year.
Adobe Systems Incorporated now trades at 23 times trailing earnings, which seems high considering that operating income has been down. The sell-side expects better numbers in a couple years- the forward P/E, based on consensus forecasts for the fiscal year ending in November 2014, is 21- but even that valuation seems high and of course analysts are often too bullish.
Jeffrey Ubben’s ValueAct Capital had Adobe Systems Incorporated as one of its top stock picks at the end of September; the fund’s position of 31 million shares gave it over $1 billion invested in the company at that time (find more of Ubben’s favorite stocks and read more about ValueAct). Two other funds in our database of 13F filings with significant positions in Adobe were Brave Warrior Capital, managed by Glenn Greenberg (check out Greenberg’s other stock picks), and Ricky Sandler’s Eminence Capital.
How does Adobe compare to its peers?
Adobe’s peers in the application software business include Microsoft Corporation (NASDAQ:MSFT), Oracle Corporation (NASDAQ:ORCL), and SAP AG (NYSE:SAP). SAP has similar valuation multiples to Adobe: its trailing price-to-earnings multiple, for example, is 24. In the third quarter of 2012, SAP reported somewhat higher revenue- though a sharp decline in net income- compared to the same period in 2011. Microsoft and Oracle, meanwhile trade at discounts to these two companies. If we look at forward P/Es then Microsoft’s discount is particularly large, though we would expect a pop to earnings in the next couple years from customers buying the new versions of Windows and Office. In addition, we worry that analysts may have overestimated sales figures particularly for Windows 8, making the company look cheaper on a forward basis than it would actually be. Still, we think it is worth watching for further developments. Oracle reported high earnings growth in its most recent quarterly report versus a year earlier, though revenue was up only slightly. That stock carries trailing and forward P/Es of 16 and 12, respectively. We’d note that Microsoft and Oracle both made our list of the ten most popular tech stocks among hedge funds for the third quarter of 2012.
Insider purchases are useful to know about, but shouldn’t be blindly followed as while they do beat the market on average, this is not always the case. Adobe doesn’t have an attractive valuation, including compared to some mega-cap software companies, and so we wouldn’t advise investors to be buying the stock right now.
Disclosure: I own no shares of any stocks mentioned in this article.
