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Adobe downgraded ahead of earnings report

Shares of Adobe Systems (Nasdaq: ADBE) fell about 10 percent Thursday after the stock was downgraded to "neutral" by an analyst, who cited valuation concerns and a tech slowdown.

Shares in the software company were down or 7.19 to 59. The stock dipped in November when another analyst downgraded the stock, citing valuation.

Morgan Stanley Dean Witter analyst Rebecca Runkle downgraded shares to "neutral," from "outperform," blaming the economy and valuation rather than internal problems at the company.

"Adobe trades at a (price to earnings ratio) to growth of two times, well ahead of its closest peers, such as Macromedia (Nasdaq: MACR). The slowing economy and spate of pre-releases, on the margin, make us more nervous about recommending such a high-multiple stock," Runkle said in a research note. She cited warnings from Apple (Nasdaq: APPL), Gateway (NYSE: GTW) and Compaq (NYSE: CPQ) as well as Kodak (NYSE: EK) as signs of troubled times for the graphics business.

Runkle said she's not expecting any negative surprises in the company's fourth quarter report, since Adobe has good near-term visibility. If anything, the company could top the Street's consensus of 29 cents a share, she added.

But the company's graphics business could be hit by a slowdown, Runkle noted, as about a third of Adobe's revenues come from print publishing, which is undergoing a slowdown in ad spending.

Runkle changed her target price from $100 a share, to "not applicable."

The analyst also said the tide could turn quickly if anything in the company's report tonight is cautious; she noted that now, however, the Street "is almost uniformly bullish, despite the steady flow of unsettling economic and corporate news/data."

"About 12 sell-side analysts are currently recommending Adobe (Strong Buy, Buy or Outperform) and only four are neutral," Runkle noted.

J.P. Morgan analyst Aditya Narayanan said Wednesday in a preview of the company's fourth quarter report that the company is expected to pull in some upside to revenue and earnings expectations, and report Photoshop and Acrobat as the business's drivers.

"Our thesis on Adobe remains largely unchanged and believe $84 remains fair value for the stock barring any change in guidance," Narayanan said.

The only challenges seen for the company in fiscal 2001 is execution, with the company planning to expand its workforce by 250 employees every quarter.

Narayanan maintains a "buy" rating on the stock.


Adobe Systems slides on BofA downgrade