Fri11282014

Business & Real Estate

Market still follows Fed Reserve moves

After Federal Reserve Chairwoman Janet Yellen last week said the economic outlook appeared positive and hinted that interest rates would remain low through 2016, the market continued toward more new highs.

While the Dow Jones industrial average is criticized for comprising only 30 stocks, it also tracks broader indexes. With the combination of an improving economy, rising earnings and cheap borrowing costs, investors should feel confident about the market.

With the Dow industrial and transportation averages reaching new all-time highs this month, the bull market is not over. However, if inflation picks up and the Fed starts raising rates, it could pose problems for investors. A big-time surge in the market could leave stocks vulnerable to a correction.

Two stocks of note are in the news.

• Adobe Systems Inc. (ADBE; $73.06) posted its second-quarter results June 17, with the company reporting more than 2.3 million paid subscribers for its Creative Cloud service – an increase of 464,000 over the previous quarter.

The results prompted a record-closing stock price of $74.69, the highest since the company’s initial public offering in 1986. Profit, excluding several items, totaled 37 cents per share for the period ending May 30, ahead of Wall Street expectations.

Adobe has attempted to recruit customers to purchase subscriptions for cloud-based software and replace one-time purchases with cloud subscriptions to Creative Cloud products like Photoshop, Dreamweaver and Illustrator.

Revenue rose 5.7 percent to $1.7 billion for the first growth in the past six quarters. Second-quarter net income rose to $88.5 million, or 17 cents per share, compared to the previous quarter’s $76.5 million, or 15 cents per share.

According to Morgan Stanley, considering Adobe’s recent moves, there is headroom to grow, and the company should continue its robust performance. Six brokers consider Adobe stock a strong buy, with none deeming it an underperform. The median target price is $80, with a high of $87.

Adobe is based in San Jose, but its two co-founders, who started the company in 1982, are Los Altos residents.

• SanDisk Corp. (SNDK; $102.18) last week agreed to purchase Fusion-io Inc. for $1.1 billion, or $11.25 per share, in cash. SanDisk, the king of flash-memory storage systems, is acquiring Fusion-io to bulk up its flash storage business. The deal is expected to close in September.

SanDisk sales grew more than $1 billion in 2013 and will top $6 billion in annual revenues for the first time. Profits ballooned 150 percent.

Fusion-io, a developer of flash-based hardware and software for enterprise data centers, provides SanDisk with a new chip customer base and higher gross margins. Founded in 2006, the Salt Lake City Fusion-io went public in 2011 for $19 per share and eventually topped $40 per share by the end of the year.

With many mergers and acquisitions in the industry to manage the shift to cloud computing, SanDisk agreed to buy Fusion-io because it provides storage for Facebook Inc., Apple Inc. and Hewlett-Packard Co.

In the past year, 60 percent of Fusion-io sales were to Silicon Valley companies, but Fusion-io still reported a loss in five consecutive quarters – which begs the question of whether it is a good buy for SanDisk.

For the past two years, the upgrade and downgrade history of SanDisk stock has remained a buy and is currently a strong buy. The median target price for stock is $110, with a high of $130.

Clyde Noel is a Los Altos Hills resident and longtime investor in stocks.

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