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Adobe Systems overcomes obstacles to continue rise

Q: What's the outlook for my shares of Adobe Systems Inc.? They have disappointed. M.A., via the internet

A: Coming off a lacklustre year, this pioneering software company that is famous for its Flash, Photoshop, Illustrator and Acrobat products should have a better 2011.

Online video is a booming business, aided by the popularity of mobile computing and increasingly sophisticated website content. An improving economy should provide an added boost.

One drawback is that Apple Inc.'s iPhone and iPad do not support Adobe Systems' Flash Player, and Apple CEO Steve Jobs has, in fact, been openly critical of Flash.

Nonetheless, Adobe Systems is continuing with this popular product and upgrading it because of the strong market it has found in devices using Google Inc.'s Android mobile operating system. To enhance Flash-based applications, it purchased Omniture in 2009 in order to gain its tools and analytics engine.

Shares of Adobe Systems (ADBE) are up 12 percent this year following a decline of 16 percent last year. While not as enormous as some competitors, it is dominant and profitable in its niche, with plenty of cash and modest debt.

With so many creative professionals having been trained on the company's Photoshop and Illustrator products, it won't be easy for rivals to overtake its powerful influence. Creative Suite 6, the latest version of this group of popular products, is expected to come out this year and improve the company's results.

Its Acrobat PDF has become the standard for portable documents and it also sells a line of digital photography and video editing software to professionals and consumers.

Consensus rating on Adobe Systems stock is “hold”, according to Thomson Reuters, consisting of four “strong buys”, six “buys” and 18 “holds”.

Despite its impressive product line-up, the company is dependent upon the economy and advertising spending. Competitors such as Microsoft Inc. and Google have made inroads into some of its product areas, though Microsoft is hampered by antitrust considerations.

To expand its Flash applications, the firm recently introduced Molehill, a new gaming engine within Flash that allows developers to deliver games online. Retailer GameStop Corp. is offering a suite of games through an online arcade created by Flash. Shantanu Narayen, former president and COO, has been CEO of Adobe Systems since 2007.

Earnings are expected to increase 19 percent this year versus a four percent gain forecast for the software industry. Next year's projected 11 percent gain compares to the 23 percent expected industry-wide. The five-year annualised return is estimated to be 13 percent compared to 15 percent predicted for its peers.

Q: I am a retiree who owns shares of MFS Utilities Fund. Can I continue to stick with this fund? B.M., via the internet

A: Because it's not your average utilities stock fund, it may not fit an obvious niche in your holdings and may also be a bit more risky than its peers.

Portfolio manager Maura Shaughnessy considers herself an opportunist. Her diversified fund includes not only traditional utilities but also utility-related companies. About one-third of holdings are in foreign stocks.

The $3.5 billion MFS Utilities A (MMUFX) is up 20 percent over the past 12 months and has a three-year annualised return of two percent. Both results rank in the top one-fifth of utilities funds. Its five-year annualised return of nine percent places it near the top of its category.

“Cable stocks in the fund's portfolio such as Virgin Media and Comcast aren't traditional utilities, but they do go into peoples' homes,” observed David Kathman, mutual fund analyst with Morningstar Inc. in Chicago, who doesn't consider the fund a core holding. “It also has a lot of energy exposure, which can be good or bad depending on the source of the energy.”

Veteran investor Shaughnessy has been in charge of the fund since its 1992 inception. She has about 90 stock holdings with a few bonds to reduce volatility. Her foreign holdings include Europe due to a favorable regulatory environment there and attractive emerging markets such as Brazil.

She was previously an analyst for MFS, Harvard Management and the Federal Reserve. She has managed two other MFS funds. According to filings, she has between $100,000 and $500,000 of her own money in the fund.

Nearly half of its portfolio is in utilities, with one-fourth in energy and other concentrations in energy and media. Its top stock holdings were recently Virgin Media Inc., CMS Energy Corp., Williams Cos. Inc., Comcast Corp. QEP Resources Inc., EQT Corp., Cellcom Israel Ltd., NextEra Energy Inc., AES Corp. and Public Service Enterprise.

This 5.75 percent “load” (sales charge) fund requires a $1,000 minimum initial investment and has a 1.07 percent annual expense ratio. MFS is majority-owned by Canadian insurer SunLife Financial.

Q: I may rent a room to a student for half the year. Do I need to claim that income on my taxes? C.G., via the Internet

A: Taking in boarders has become a lot more common as Americans seek to wring a few dollars from their home due to the recession.

Money received as rent in payment for the use of property, such as a room in your home, must be included in your gross income. It is reported to the IRS on Schedule E.

“As a general rule, any expenses that you incur related to the rental income are deductible,” said Susan O'Grady, certified financial planner with Equipoise Wealth Management Inc. in Denver, Colorado. “Expenses related to owning your home, such as utilities and maintenance, can be used to reduce the tax impact of the rental income.”

Those expenses must be allocated so that only the portion related to the rental space is deducted. A ratio determined by dividing the square footage of the rented room by the total square feet in your home is the common allocation method.

“You must also claim depreciation for that percentage of your home,” concluded O'Grady.

Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, 555 N. Central Ave., Suite 302, Phoenix, Ariz. 85004-1248, or by e-mail at andrewinv@aol.com.

Apple CEO Steve Jobs smiles with new iPhone at the Apple Worldwide Developers Conference, Monday, June 7, 2010 in San Francisco. ¬ (AP Photo/Paul Sakuma)

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Published March 12, 2011 at 9:00 am (Updated March 11, 2011 at 8:17 pm)

Adobe Systems overcomes obstacles to continue rise

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