Intuit (INTU) is a stock with upside due to strong financial health, strong profitability, solid cash flow and efficiency, and a lot of growth potential. Intuit has a simple and well thought-out growth plan that could tap into billions of dollars of opportunities that it has identified. We see the company as having around 38% upside in the next twelve months with our $88 price target.
INTU has decent value that is a little below positive. The stock's future PE is 21.8, and we look for value below 15. So this ratio is a little high but INTU's future PE at 17.4 indicates growth and comes closer to the 15 mark we look for. We can find the most positive ratios in Price/FCF and Price/OCF. These strong ratios indicate the company has good cash flow, a huge plus for INTU.
INTU's Price/Sales is very weak. We tend to look for value under 1.0. The company though is at 4.2. The company's Price/Book ratio is also very weak at 5.3. We do have to note that this ratio can be misleading. Price/Book only takes into account tangible assets. INTU has $2,413 million in intangible assets that are not being considered in the Price/Book ratio.
The company's PEG ratio is important at 1.6 as it shows decent value as well. PEG shows a company's value in comparison to its growth capabilities. At 1, the company is very valuable in comparison to growth. PEG does a good job of showing overall value, so this is a strong point for INTU.
The company shows good value in EV/Sales and its future PE as well. EV/Sales is a solid comparison of the company's market capitalization to annual sales. The ratio allows us to see how much it costs to buy the company's sales. The low EV/Sales ratio shows that it is not expensive to buy out the company, which is very positive for INTU.
Finally, INTU presently has fairly high debt levels. In later sections we will look at the details of this debt and how the company is managing it. All in all the company has good value that isn't being priced in too strongly at this point.
Growth is very strong for INTU. When we look back at YoY and five-year growth percentages we see positive numbers across the board. Even projected 2013 and 2014 growth ratios are strong. Let's look at what INTU has to say about its growth record and future prospects.
In the company's Q3 earnings report INTU reports its third-quarter revenue at $2.178 billion, up 13% YoY. The company attributes this mainly to promotion of Small Business Group revenues, up 17% for the quarter, through strong growth in online sales. The company introduced QuickBooks Online for the iPad, designed for small businesses that need to be mobile. INTU also launched Intuit Pay in the UK, making itself the first company to market mobile payment solutions in that region. During Q3, the company also doubled QuickBooks Online-paying customers to 27,000 in more than 100 countries outside the US.
In this report Brad Smith, INTU's president and CEO, stated, "We continue to see strong progress delivering on our connected services strategy across our businesses in the third quarter. TurboTax paid units increased 4 percent, and we expect TurboTax revenue growth of about 4 percent for the fiscal year. While it was a challenging tax season overall, we made progress in several key areas, growing new customers including first time and former tax store customers, and significantly increasing mobile adoption. Activity is already well underway for next year, with an intense focus on product and customer experience."
We will look at the details of INTU's growth initiatives later in the "Catalyst" section of this article.
We see a steady amount of growth in INTU's recent financial history and believe that the company is making the right decisions to continue that growth in the coming fiscal year.
Profitability is very strong for INTU. Let's see how the company compares to the competition.
The company's closest competition is H&R Block, Inc. (HRB), Sage Group plc (OTCPK:SGPYY) and Microsoft Corporation (MSFT). Operating margins for INTU are very high at 27.6%. How does that compare to HRM, SGPYY and MSFT? The companies have operating margins at 24.0%, 12.5% and 34.4%, respectively. We can see that INTU is very strong for the industry but is beat out by MSFT. When we look at gross margins, the companies have ratios at 44.8%, 93.9% and 74.0%, respectively. Again INTU lands at the higher end of the competition but is beat out this time by SGPYY. These numbers tell us that elevated margins are standard for the application software industry.
One thing that could be holding INTU's margins back, even though they are excellent as they stand, are its SG&A costs. In the company's Q3 earnings report, INTU shows a 15% increase YoY in selling and marketing, a 9% increase research and development, and a 9% increase in general and administrative costs. While it did experience a 33% increase in costs YoY, the company's overall revenue during this time period only increased 8%.
One of the weakest ratios in this category for INTU is Asset Turnover. This measurement tells us the amount of sales being generated for every dollar's worth of assets. INTU's Asset Turnover is not incredibly strong, although INTU's ROA is a much stronger number.
Cash Flow And Efficiency
Cash flow and efficiency is a plus for INTU. The company scores very high and is in the Positive area, and we believe this indicator is one of the best for future potential. For one, the company is now offering a strong dividend with a 1.1% yield. For investors, they want to know that the dividend is safe. Several indicators make us think that it is.
First, the company has great OCF/Sales at over 31%, and it has seen 66% growth in operating cash flow in the last five years. OCF is important to dividends because it is what is used to pay off dividends. FCF is important to see to believe that dividend hikes can occur. The company is also strong in its FCF/Sales ratio at 26.1%, and the company has seen 121.4% rise in free cash flow in the past five years, which is very positive.
Solid cash flow is also helpful to pay off debt levels and improve the business without taking on more debt, which can help improve profitability.
Let's see how INTU compares to HRB, SGPYY and MSFT in days sales outstanding, days inventory and the cash conversion cycle. HRB sits with 17.4, N/A and N/A, respectively. SGPYY is at 87.9 for days sales outstanding, 11.1 for days inventory and -1028.2 for cash conversion cycle. For MSFT, the company has 78.0 days sales outstanding, 27.7 days in inventory and 24.6 cash conversion cycle.
As we can see efficiency ratios are a little different for application software companies. Often its products are intangible so we cannot measure the shelf life of products or how quickly they are sold. What we can deduce from these ratios is that HRB is INTU's best comparison though, and it does have a better days sales outstanding ratio.
As we discussed briefly previously, INTU's asset turnover is decent but the company is not making a great deal of money off of its assets. That compares to 0.6 at HRB, 0.6 at SGPYY, and 0.6 at MSFT. In this comparison we see INTU is doing better than its competitors in asset turnover.
Financial Health is very strong for INTU. The company's current ratio at 1.8 is above the 1.0 threshold we look at for financial health, and the quick ratio at 1.5 is well above the level we look at before we see a major red flag at 0.5. How do these ratios compare to INTU's competition?
HRB has a current ratio at 0.8 and quick ratio at 0.7. SGPYY has a current ratio at 0.5 and quick ratio at 0.5. Finally, MSFT has a current ratio at 2.9 and quick ratio at 2.7. We see that INTU beats out all the competition except MSFT, which has outstanding current and quick ratios.
We see debt-to-equity at 8.6, which is very high. What's wrong with such a high debt-to-equity ratio? High debt levels versus equity levels can affect the company's ability to generate earnings as a result of high interest payments. How can INTU have such good financial health with high levels of debt?
We use interest coverage ratio to measure how much a company is burdened by interest expenses. A ratio under 1.0 means the company is having problems generating enough cash flow to pay its interest expenses. Ideally we want the ratio to be over 1.5. At 39.8 INTU is having no problems with its interest expenses.
Earlier we saw that INTU has relatively high debt levels. Here we see that the company is making its interest payments without a problem, and also that the current liabilities are low compared to other important metrics like gross profit, operating cash flow and cash and cash equivalents. While the company may have debt, it is managing it very well.
In a recent investor presentation, INTU outlined its growth strategies and priorities for fiscal years 2013-2015. The company breaks it down into five different categories: Amazing 1st Use Experience, Reimagining Mobile 1st/Mobile Only, Solving Multi-Sided Problems Well, Expanding Globally, and Enabling Customer Data. INTU is working to deliver a great customer experience from the first use. INTU wants to expand and innovate the mobile experience, which has continually been a cornerstone of the company's product. How exactly does INTU plan to do this?
First of all, INTU has identified the company's Small Business Group segment as one of the greatest opportunities. INTU's QuickBooks product is what it can offer, and the company has identified a $5B opportunity in this area. QuickBooks solves small business payments needs through QuickBooks payments, retail payments and mobile payments anywhere, with any payment type, on any device. If Intuit can tap into this area, it could mean huge growth for the company.
Another opportunity INTU has identified is growing its consumer base for its product: Demandforce. This product helps SMBs thrive in an evolving and increasingly complex, connected world. Users will benefit from automated marketing and communications solutions. INTU sees this as a value proposition based on generating 3x ROI each month. Again, the growth opportunity here is huge.
The next area of opportunity INTU identifies is consumer tax. As of 2012 its product TurboTax was only making up 21% of total tax returns, and 7% of revenue for INTU. The company sees this as an opportunity for long-term growth. In a comparison with other accounting options, INTU shows that its TurboTax software is far more affordable than a CPA or Franchise. It then shows that INTU's biggest percentage of TurboTax customers is its retained pre-existing customers. So it shows that the product TurboTax, once a customer uses it, does a great job of keeping those customers coming back. Given all this information INTU has announced its plan to grow TurboTax revenues to reacquire and retain customers. With this new goal in mind, INTU has projected 8-9% revenue growth guidance for the full 2013 fiscal year.
All in all INTU's growth plan is simple. For all of the software mentioned the company's goal is to attract and acquire new users, retain existing users and increase its offerings to each user to insure maintained profits and increased revenues during the 2013-2015 fiscal years.
Price Target Analysis
Project operating income, taxes, depreciation, capex and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.
Available Cash Flow
Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012). WACC for INTU: 7.1%
PV Factor of WACC
PV of Available Cash Flow
For the fifth year, we calculate a residual calculation. Taking the fifth year available cash flow and dividing by the cap rate, which is calculated by WACC subtracting out residual growth rate, calculate this number. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. Cap Rate for INTU: 4.1%
Available Cash Flow
Divided by Cap Rate
Multiply by 20167PV Factor
PV of Residual Value
Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:
Sum of Available Cash Flows
PV of Residual Value
Interest Bearing Debt
Divide equity value by shares outstanding:
With a lot of potential upside from new products and growth opportunities, we believe INTU is a very solid growth name with good value and solid financial health. On top of that, the company delivers a dividend to investors as an added bonus. With around 30% potential in the next twelve months, we like INTU as a low-risk buy.