Adobe Inc (ADBE) and Chubb Ltd (CB) are both industry leaders trading at very different valuations. ADBE trades at about 25X 2023 adjusted earnings per share (EPS) and CB trades at under 11X 2023 EPS, while the S&P 500 trades for just under 19X 2023 EPS. The difference in valuation exists despite similar projected earnings growth over the next 3 to 5 years of about 14%.
ADBE’s products include Photoshop and Illustrator, which are considered the industry standard for editing digital images (Photoshop) and designing digital graphics and illustrations (Illustrator). And of course, Adobe Acrobat is the industry standard for creating, converting and editing PDFs. Adobe has other products which supplement these core products, in addition to the Adobe Experience Platform, which helps businesses market to their customers. All products are sold on a subscription basis.
CB is the largest publicly traded property and casualty insurer and is the leading commercial lines insurer in the US. CB is the top or one of the top insurers in most of its other segments and has increased its market share in the fast-growing Asian market. CB has a strong reputation as an underwriter that chooses which policies to underwrite without chasing market share. This results in lower losses per policy and higher margins than its competitors. CB will also benefit from the rise in interest rates.
ADBE has historically grown earnings and revenue in the low to high double-digit range. The company shifted to a subscription-based model about 10 years ago, and continues to add subscribers and upsell current subscribers, increasing users and revenue per user. We believe growth may slow, but still be in the double digits. One driver is the number of content creators that is likely to grow as more advertising dollars shift to social media companies. Another driver is the technology Adobe is adding to its product line-up, like AI capabilities for Photoshop. This should drive both new users and revenue from existing users. This growth rate and continued position as an industry leader means ADBE should continue to trade at a premium and provide strong shareholder returns.
CB has historically grown earnings in the mid-single digits. Current estimates are higher due to increased earnings from the interest earned on its investments because of the higher rate environment. These added earnings will occur over the next year or so, after which the company will most likely return to its historical earnings growth rate. Recent acquisitions in Asia should boost earnings a little as well. CB will most likely see an even lower multiple in a year or so, as the higher interest earnings kick in. However, the market will understand that the “pop” in earnings from raised interest rates will not continue, but simply provide a higher base going forward. Revenue and earnings growth will be driven by premium growth, i.e., CB underwriting more insurance policies. This growth, along with continued price discipline when underwriting the policies, should provide strong shareholder returns.
Despite the different valuations and similar estimated growth rates, both companies make for a compelling investment.