Intuit: For Many Happy Returns

Users of TurboTax, Quicken and Quickbooks help Intuit (INTU) make profits year after year. Intuit's software products are industry leaders on both the consumer and professional side of their markets. Once you start using their products you're likely to stay with them for ease of use and year-over-year continuity of data.

This is a well established and renewable market as each year's tax forms are unique. The annual renewability of sales makes Intuit meet Warren Buffett's description as a 'razor blade' type company (like Berkshire's (BRK.A) Gillette).

INTU has shown outstanding and predictable growth in virtually every measurable way. Here are the (split-adjusted) per share numbers for the past nine fiscal years (as reported by Value Line). FYs end July 31 of the same calendar year.

FY …….. Sales …… C/F …... EPS …... B/V ….. .Avg. P/E

2000 …... 2.68 …… 0.85 ….. 0.32 ….. 5.07 …… 66.9x

2001 …... 3.00 …… 0.54 ….. 0.40 ….. 5.13 …… 53.2x

2002 ……3.22……. 0.69 ….. 0.54 ….. 5.25 …… 36.8x

2003 ……4.14 …… 0.92 ….. 0.70 ….. 4.93 …… 32.6x

2004 ……4.91 …… 1.04 ….. 0.84 ….. 4.79 …… 27.2x

2005 ……5.80 …… 1.32 ….. 1.00 ….. 4.73 …… 21.6x

2006 ……6.78 …… 1.55 ….. 1.23 ….. 5.03 …… 21.0x

2007 ……7.89 …… 1.77 ….. 1.43 ….. 6.00 …… 21.4x

2008 ……9.52 …… 2.04 ….. 1.60 ….. 6.43 …… 18.1x

Consensus estimates for FY 2009 (ends July 31^st) are now centered on $1.70/share, which would be another new all-time high EPS. FY 2010 estimates are now at $1.93/share.

That puts the current fiscal year P/E at just 14.15x. That's among the lowest multiples that these shares have traded for since the company's IPO in March 1993. While we are unlikely to see a quick rebound to the 10-year median P/E of 26x, I could easily envision a bounce back to at least 16 times the calendar 2009 expected EPS of $1.75 for a conservative 12-month target price of $28.

Is that reasonable to expect? INTU shares hit peak share prices of $36, $33.10 and $32 in 2006, 2007 and 2008 while fundamentals were not as good as they are today.

Value Line rates Intuit's financial strength as 'A' and notes it ranks in the 80^th percentile for 'stock price stability' and in the 95^th percentile (with 100^th being best) for 'earnings predictability' compared to all stocks in the 1700 stock VL universe.

Clearly there is room for a much higher share price for a high-quality, consistent grower like Intuit. Even so, here is a buy/write option combination that makes sense if you feel that 'the market' may stay depressed in the near term.

………………………………………….. Cash Outlay …....… Cash Inflow

Buy 1000 INTU @ $24.05 ………………. $24,050

Sell 10 Jan. 2010 $25 Calls @ $2.50 ………………………… $2,500

Sell 10 Jan. 2010 $22.50 Puts @ $3.50 …………………….... $3,500

Net Cash Outlay ………………………….. $18,050

On expiration date (Jan. 15, 2010) if INTU is $25 or higher (+ 4% or better from today's quote):

• Your $25 calls will be exercised and your shares sold for $25,000.
• Your $22.50 puts will expire worthless (a good thing for you as a seller).
• You will have no further option obligations.
• You will have $25,000 for your original $18,050 outlay.

That's a gain of $6,950 on shares that only needed to go up by at least 4%.

If INTU shares finish below $22.50 you would be forced to buy and pay for an additional 1000 shares.

• Your $25 calls would expire worthless.
• Your $22.50 puts would be exercised.
• You would buy another 1000 shares for $22,500.

The net cost of $19.00/share would be 5.8% below where INTU traded at the nadir of the recent panic low.

You would now own 2000 shares total.

What's your risk?

Break even on this whole trade is figured as follows:

On the original shares it's your purchase price of $24.05 less the $2.50 call premium = $21.55/share.

On the second 1000 shares that were 'put' to you it's the $22.50 strike price less the $3.50 put premium = $19.00/share.

Your average net cost basis is thus $20.28/share - lower than the lows at any time during 2006 – 2007 – 2008.

If the shares perform as expected and are $25 or better by Jan. 2010 you will make a 38.5% cash-on-cash return. If the shares end up below $22.50 your overall cost basis is near the past three years' absolute lows and about 10.5x earnings versus their historical median valuation of 18x – 26x.

Hopefully, you may even end up using Intuit's products to figure your profit and report your capital gain.

Disclosure: Author is long INTU shares and short INTU options.

Comments

[Urbane Gori...:]

Also notable is a yearly patterned 10% run up from the end of February or first week of March, up to about the 15th of April and then a drop back. Then a second run with similar results occurs at and around the first week of May. An easy 20% in a matter of 2 months each year. Buy on a stochastic oversold Daily chart and sell on the drop down back through the 80 mark. Short on the way down if you can and you can get another 20% on that trip for a total 30% ...

The nice thing is you don't even have to declare your profits till the following year either... jegan ;-)

Jan 15 01:38 AM