Our 5 years discounted cash-flow (DCF) analysis and comparables lead to a target price in the range of $35 - $40 for the WACC between 11% and 13.5%. This price takes into account the long-term forecast of the company. Intuit is seeking new ways of increasing sale and improve its business model. Even though Intuit’s (NASDAQ:INTU) Small Business segment has been growing, we are concerned about the future growth prospects of this segment, primarily due to increased competition from larger players like Microsoft (NASDAQ:MSFT). We are comfortable with our quarterly revenue estimate based on current performance. Intuit is on track for the coming five years to maintain 7%-9% YoY revenue growth with solid performance from its growth drivers: QuickBooks, Payroll and Financial Institutions. We believe in the medium term however that Intuit will reach a growth plateau and the growth rate will slow. Our valuation is in line with the consensus estimate of $1.78 to $1.89 for EPS and $1.56B for fourth quarter revenue.
Intuit provides software solutions for small and medium sized businesses, financial institutions, consumers and accounting professionals. The company’s flagship products and services include QuickBooks, Quicken and TurboTax. These products simplify small business management and payroll processing, personal finance, and tax preparation and filing. Intuit has major presence in the US, Canada, India, and the UK. The company operates through six segments: consumer tax, QuickBooks, payroll and payments, accounting professionals, financial institutions and other businesses.
Application software industry outlook
The current recession is sparing few sectors, as companies continue to slash their spending budgets in an attempt to improve 2009 bottom lines, software purchases have been reduced significantly. Financial management and tax solutions software - categories that have held up much better during 2008 than the rest - are also experiencing decreased spending going forward. But we believe as the economy is bottoming up and inventories at a lowest level, companies will start to increase spending in software solutions in Q1’10. The second trend in the industry is the fierce competition with players such as H&R Block (NYSE:HRB), Mint.com, JACKSON HEWITT TAX, and Microsoft (MSFT). This competition increases pressure on Intuit to maintain its market share and margin going forward.
Given Intuit’s proven track record of margin expansion since FY2000, we think the company has reached a plateau. Operating margin above 27% from 2005 to 2008 has remained at that level (on a yearly basis). We expect operating margin in the same range from 2009 to 2014. In April 2009, the operating margin came in at a robust 58% as more customers migrate to the company’s higher-margin online filing. Intuit will continue to pursue a well defined and aggressive strategy. This shows readiness of management to quickly adapt to the changing environments. The company has tried to diversify by increasing its presence in UK, Canada and India.
Aggressive acquisition strategy of competitors: Intuit acquired PayCycle in July, 2009. But the competition is fierce in the software solution industry. Intuit faced challenges in its Digital Insight, QuickBooks and other businesses. Jefferies downgraded Intuit to a Hold rating, mentioning the company will see a second consecutive year of declining ASPs in its consumer tax business, as well as unit share losses to its biggest competitors, H&R Block, JACKSON HEWITT TAX, and Microsoft. In our valuation model, the company’s drivers still look promising and comparables are at the above average level of the industry. Considering the competitive environment, we see an upside capped at 20% relative to the current stock price. Below $30 we recommend a buy and above 35$ a sell of the stock. Intuit is a medium term 2-3 year’s long position in portfolio. After this horizon there are few catalysts for growth.
Through its vertical and horizontal integration, Intuit Inc. increased its customer base, particularly in Enterprise solutions, and the company increased its investments in R&D. Finally, for a long period, the company shows strong performance but the increased competition has increased the downside risk for Intuit.
Intuit should take advantage of its financial strength and acquire companies providing alternative solutions. The company should take advantage of the new tax policy as this is the opportunity to considerably increase its business activity as many entities will need adjustments in their tax forms.
- Competition: Intuit’s main competitors are Mint.com, JACKSON HEWITT TAX JHT, H&R Block, Inc. An increase in flexibility of the new tax systems and this competition causes Intuit to be more aggressive.
- Operational challenges: Intuit encountered inefficiency in its operations in 2007, refunding approximately $9 million in credit card charges for its consumer electronic filing and online tax preparation services.
- Concentration: Mainly concentrated in the US with only a small part of revenue generated from overseas (Canada, India, and UK), Intuit misses opportunities in overseas growing markets.