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Is Adobe Systems Incorporated (ADBE) Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Adobe Systems Incorporated (NASDAQ:ADBE) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

Adobe Systems Incorporated (NASDAQ:ADBE)

What we’re looking for
The graphs you’re about to see tell Adobe Systems Incorporated (NASDAQ:ADBE)’s story, and we’ll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s take a look at Adobe Systems Incorporated (NASDAQ:ADBE)’s key statistics:

ADBE Total Return Price Chart

ADBE Total Return Price data by YCharts.

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 30.5% Pass
Improving profit margin 14% Pass
Free cash flow growth > Net income growth 31.1% vs. 48.9% Fail
Improving EPS 55.7% Pass
Stock growth (+ 15%) < EPS growth 46.1% vs. 55.7% Pass

Source: YCharts. * Period begins at end of Q2 (May) 2010.

ADBE Return on Equity Chart

ADBE Return on Equity data by YCharts.

Passing Criteria 3-Year* Change Grade
Improving return on equity 11.8% Pass
Declining debt to equity (24.7%) Pass

Source: YCharts. * Period begins at end of Q2 (May) 2010.

How we got here and where we’re going
Adobe Systems Incorporated (NASDAQ:ADBE) comes through with flying colors, earning six out of seven passing grades. Its only failure occurred because net income growth outpaced free cash flow, though its current free cash flow is nearly twice as high in nominal terms as its net income. Adobe’s impressive share-price rebound, which began in mid-2011, is still moderate enough on a longer timeline to fall below the growth of the company’s earnings per share, which is a great sign for future returns. This is a strong performance, but can Adobe Systems Incorporated (NASDAQ:ADBE) keep up the progress? Let’s dig a little deeper to find out.

Fool contributor Richard Saintvilus notes that Adobe Systems Incorporated (NASDAQ:ADBE) has accelerated its transition from its long-standing permanent software license model to a cloud-based services setup. The company now offers online subscriptions of its Creative Suite software. Since then, it has produced half a million paid subscribers, a number expected to reach 1.25 million by the end of the year. However, this shift has crimped near-term growth, and it may take some time for the company to surpass its old sales levels.

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