Welcome to Fundamental Fridays! Today, we will examine Adobe Systems (Ticker: ADBE).

According to its Yahoo! profile, Adobe Systems provides “business and mobile software and services worldwide.” The company was founded in 1982 and is headquartered in San Jose, California.

Photo by Engin Erdogan, Courtesy of flickr

I picked Adobe because I have been having serious issues with the company’s Flash and Shockwave players all week long!

In the past 52 weeks, Adobe has moved right along with the S&P 500. ADBE has lost 47.89 percent of its value. The S&P 500 lost 47.67 percent of its value during the same period. Yesterday, ADBE closed at $16.92. Should you roll the dice on Adobe?

Fundamental analysis can include valuation ratios, credit risk and evaluation of a company’s management, competition and prospects for future performance. Let’s take a look at the fundamentals, using valuation ratios, credit and profitability.

Valuation measures:

Price-earnings – Compares the current market value per share to the earnings per share.  P/E ratio for ADBE: 10.26, P/E industry average: 3.48.  Signal: OVERVALUED

Price-sales – Compares the current market value per share to the revenue per share.  P/S ratio for ADBE: 2.39, P/S industry average: 0.58. Signal: OVERVALUED

Price-cash flow – Compares the current market value per share to the cash flow per share. P/CF ratio for ADBE: 7.51, P/CF industry average: 2.21. Signal: OVERVALUED

Credit:

Current ratio - Current assets relative to current liabilities. Current ratio for ADBE: 3.59, current ratio for industry: 2.91

Total Debt to Equity - Total liabilities relative to total shareholder’s equity. TD ratio for ADBE: 7.94%, TD ratio for industry: 14.32%

Profitability Measures:

Return on Assets - Net income relative to total assets. ROA for ADBE: 15.12%, ROA industry average: 3.17%

Return on Equity - Net income relative to total equity. ROE for ADBE: 19.24%, ROE industry average: 6.07%

Profit margin - Net income relative to revenue. PM for ADBE: 24.35%, PM industry average: 3.61%

Earnings (EPS) growth - 5 year growth of earnings per share. EPS growth for ADBE: 23.57%, EPS growth for the industry: 8.47%

Bottom Line: Valuation ratios suggest that ADBE is overvalued. However, ADBE has less debt, higher liquidity, higher profitability, and higher earnings growth relative to its peers.

Based on the ratios used today, TST’s Fundamental Friday Recommendation: BUY

Remember: This is not a recommendation to buy stock, just a test to see what fundamentals suggest. Ratios should not be used as the sole basis of your investment decisions and many figures used come from financial statements.

Since this is the final Friday of 2008, I decided to take it back to the basics…of stock valuation!

In late October I began hosting Fundamental Fridays to see if trading on the fundamentals could yield profits. So far I have used ratios like price-to-earnings (P/E), return on equity (ROE), and return on assets (ROA) to examine the valuation of four companies: Dell, Alcoa, Amazon.com and Nike.

Here are the results:

10/31: Dell (Ticker: DELL) - Recommendation: BUY, 12/24 Price: $10.65. At the time of this recommendation, shares of Dell were trading at $12.20…strike one!

11/14: Alcoa (Ticker: AA) - Recommendation: BUY, 12/24 Price: $9.39. Alcoa’s shares were trading at $11.20 at the time of this recommendation…strike two! 

12/5: Amazon (Ticker: AMZN) - Recommendation: SELL, 12/24 Price: $51.44. Amazon is trading about $3 higher per share since this recommendation was issued…strike three! :( 

12/19: Nike (Ticker: NKE) - Recommendation: BUY, 12/24 Price: $49.13. Nike’s shares have fallen more than $3 since this recommendation…there is no such thing as a fourth strike, looks like we are just out!

In this economic environment, who could have predicted that Amazon would have the best Christmas ever?  As for Nike, Alcoa and Dell…I have no explanation!

TST’s Fundamental Fridays analysis uses old information about annual figures (earnings, dividends, assets, cash flow, etc.) to determine if a stock is undervalued, overvalued or fairly priced.  It will take longer than a couple of weeks or a couple of months to determine if fundamental analysis is accurate.

Hopefully, the next quarterly review will yield more positive results!

This is the third installment of Techie Tuesdays.  So far we have looked at Exxon Mobil and Starbucks, today we will examine J.P. Morgan Chase.

J.P. Morgan Chase is a worldwide financial holding company with over 228,000 employees worldwide.  JPM brought in $51 billion in revenue last year.   The financials sector has been subject to much well deserved scrutiny as of late, it is time to see what the technical indicators reveal about this banking behemoth!

Simple Moving Average: JPM is currently trading at $32.14 per share.  As of today, JPM’s 5-day moving average is $34.23 and its 200-day moving average is $40.74.  Looking at the chart below, we can see that both the 5 and 200-day moving averages are sloping downward. 

Chart by T. Silver, Data from Yahoo 

SMA Signal: SELL because JPM has been heading downward in the short and long-term and is currently trading below both moving averages.

Exponential Moving Average: JPM closed today at $32.14 per share.  As of today JPM’s 5-day exponential moving average is $34.90 and its 200-day exponential moving average is $40.68. 

EMA Signal: SELL because JPM has been heading downward in the short and long-term, and is currently trading below both exponential moving averages. Check out Yahoo’s interactive chart with the EMAs.

Looks like bad news all around for JPM, at least on a technical front.  Next time, I will use another moving average tool, the MACD.  Please feel free to submit a stock and check out Techie Tuesday’s track record.

In the second installment of Fundamental Fridays, TST will examine Alcoa.

Alcoa is a big time aluminum producer operating in 44 countries.  In the past 52 weeks, shares of Alcoa (Ticker: AA)bottomed at $9 and peaked at $44.77.  Shares closed yesterday at $11.20.  Wondering what to do with Alcoa?  Let’s see what the fundamentals have to offer.

Valuation measures

Note: This week I have added average ratios for the sector.

Price-earnings - Compares the current market value per share to the earnings per share.  P/E ratio for AA: 5.34, P/E industry average: 3.09.  P/E sector average: 1.51 Signal: OVERVALUED

Price-sales - Compares the current market value per share to the revenue per share.  P/S ratio for AA: 0.30 , P/S industry average: 24.4,  P/S sector average: 1.33   Signal: UNDERVALUED

Price-cash flow - Compares the current market value per share to the cash flow per share.  P/CF ratio for AA: 2.72, P/CF industry average: 1.84, P/CF sector average: 1.32   Signal: OVERVALUED

Some analysts use earnings or sales with the following formula to solve for a stock’s expected price.

Expected stock price = historical P/E average x Current EPS(1 + EPS growth rate) =  19.9 x 2.95 (1+0.3724) = $80.57

For AA, the 5 year P/E average is 19.9 (from ADVFN Financials), EPS from last year $2.96 (Reuters) and 5 year average EPS growth rate is 37.24% (Reuters), resulting in an expected stock price of $80.57.  The stock is currently trading around $11 per share.  Signal: UNDERVALUED

Profitability Measures 

Return on Assets - Net income relative to total assets.  ROA for AA: 5.18%, ROA industry average: 2.17%

Return on Equity - Net income relative to total equity.  ROE for AA: 11.27%, ROE industry average: 3.70%

Profit margin - Net income relative to revenue.  PM for AA: 6.84%, PM industry average: -18.63%

Bottom Line: Mixed bag on valuation, overwhelmingly positive on profitability.  

Ratios should always be evaluated relative to a company’s competitors, sector and industry averages to see how the company stacks up.  The data used is also pulled from financial statements which have been known to be subject to manipulation.

Based on the ratios used today, TST’s Fundamental Friday Recommendation for Alcoa: BUY

TST’s first Fundamental Friday will analyze Dell Computer (Ticker: DELL).

I am particularly fond of Dell, as its stock financed a portion of my college education. :)  Many years ago, my mother stumbled upon Dell Computer when it was trading around $3.  Between 1992 and 1999, Dell shot up and issued seven stock splits.  Dell’s post internet bubble performance has been pretty rough.  In 2008, the stock is down about 50 percent and is now trading just above $12 per share.  Let’s take a look at the fundamentals.

Valuation measures:

Price-earnings - Compares the current market value per share to the earnings per share.  P/E ratio for DELL: 9.06, P/E industry average: 7.88.  Signal: OVERVALUED

Price-sales - Compares the current market value per share to the revenue per share.  P/S ratio for DELL: 0.37, P/S industry average: 1.03. Signal: UNDERVALUED

Some analysts use earnings or sales with the following formula to solve for a stock’s expected price.

Expected stock price = historical P/E average x Current EPS(1 + EPS growth rate)

For DELL, the 5 year P/E average is 25 (from Reuters), EPS from last year $1.34 (yahoo) and 5 year average EPS growth rate is 10.32% (Reuters), resulting in an expected stock price of $36.96.  Signal: UNDERVALUED

Profitability Measures:

Return on Assets - Net income relative to total assets.  ROA for DELL: 10.08%, ROA industry average: 4.07%

Return on Equity - Net income relative to total equity.  ROE for DELL: 63.58%, ROE industry average: 8.27%

Profit margin - Net income relative to revenue.  PM for DELL: 4.44%, PM industry average: 3.32%

Bottom Line: Mixed bag on valuation, positive on profitability.  According to Reuters the consensus on Dell is “outperform.”

Remember, there are a ton of ratios out there and ratios alone aren’t of much use.  You should examine these ratios relative to Dell’s competitors, sector and industry averages to see how Dell stacks up.  The data used is also pulled from financial statements, which have been known to be subject to manipulation.

Based on the ratios used today, TST’s Fundamental Friday Recommendation: BUY