CEO resigns. Stock down. Is Adobe ($ADBE) worth a look? | PULSE Framework

AI secular fears are rampant. The CEO just resigned. The stock is down almost 30% YTD. Time to take a look at Adobe ($ADBE) through the PULSE framework to see if it's worth a deep dive?

I am launching a series applying the PULSE framework to a new stock each week to illustrate the process. If you are not familiar with the framework, you can watch this video on my newly re-launched YouTube channel.

The PULSE framework combines 5 fundamental signals across all 3 financial statements to quickly place a stock into one of 3 categories:

• Not interesting

• Attractive company at a high price that maybe interesting later

• Attractive company at an interesting price

This isn't a stock recommendation system. It's a triage tool - designed to answer one question before you spend hours on research: is this worth a deeper look?

Let’s get to this week’s stock. AI secular fears are rampant. The CEO just resigned. The stock is down almost 30% YTD. It’s time to take a look at Adobe ($ADBE) through the PULSE framework to see if it's worth more research.

The “P” stands for Economic Profit, and here is what Adobe’s looks like:

• The chart is very attractive - it has positive, rising Economic Profits over a long period of time

The “U” stands for Underlying FCF, and here is what Adobe’s looks like:

• It’s a very attractive chart with positive and rising FCFs

• The ratio between FCF and Net Income over the last decade is close to 100%, which is excellent

The “L” stands for Financial Leverage, here is what Adobe’s looks like:

There is virtually zero Net Debt, so that’s excellent as well.

The “S” stands for Smoothed Underlying FCF yield, here is what Adobe’s looks like:

Note that the goal is to be approximately correct, not precise. We are screening here to decide if the stock is worth doing more work on, so it’s OK to be a bit off. I am using an intentionally conservative growth rate which is likely to be an underestimate for high growth companies.

For Adobe, the 7%+ FCF yield combined with a double-digits historical growth in FCF is interesting. No, it’s not off-the-charts attractive, but interesting nonetheless.

The “E” stands for EV Cap Rate, which is defined as:

The EV Cap Rate is a nice complement to the Smoothed FCF yield for two reasons:

1. The EV Cap Rate is based on the more recent last 12 month profits

2. It looks at the whole capital structure, not just the equity

For Adobe, the 7%+ EV Cap Rate is interesting.

Putting It All Together

Let’s put all 5 PULSE signals together for Adobe:

• Economic Profits: Excellent

• Underlying FCF: Excellent

• Leverage: Excellent

• Smoothed Underlying FCF Yield: Interesting

• EV Cap Rate: Interesting

Conclusion: Based on the PULSE framework, Adobe is worth a more serious look right now. Remember - this is just a quick screen based on historical data. It’s the starting point for prioritizing potential opportunities and you need to do a lot more of your own work before deciding whether Adobe, or any stock, is worth investing in.

Do you want to get the PULSE template so that you can save many hours screening stocks and focus on the highest-potential opportunities? You can get it here.

Disclaimer: Not financial advice, for educational purposes only.

About the author

Gary Mishuris, CFA is the Managing Partner and Chief Investment Officer of Silver Ring Value Partners, an investment firm that seeks to apply its intrinsic value approach to safely compound capital over the long-term. He also teaches the Value Investing Seminar at the F.W. Olin Graduate School of Business.