The Upside To Intuit: How Short-Term Loss May Turn Very Profitable

Jun. 02, 2015 12:36 PM ETIntuit Inc. (INTU)3 Comments
Aaron Faulkner profile picture
Aaron Faulkner
353 Followers

Summary

  • Intuit lowered its previous EPS estimates for Q4 2015. This will deepen EPS losses by nearly $0.12 and may inspire uneasiness as Intuit Director Greene sells $3,141,000 in shares.
  • The prolific bookkeeping company has invested in a stock buyback program.
  • The long-term growth should give ample opportunity for investors to capture growth at a value, as well as give short interest a 20% potential downfall.

Time to be bearish?

Intuit (NASDAQ:INTU) may be slipping away from its current price. The company recently reported third-quarter revenue of $2.2 billion that came in above previously set guidance. Driven by many financial events, Intuit's recent gains have come at a time when the company is delivering poorer than average QoQ results.

The company has weaved a successful story, demonstrating excellent management and their ability to increase earnings with little turbulence. Shares have crossed their previous all-time high during interday trading in anticipation of future growth.

*Most Recent INTUIT Data: 2015 Fact Sheet / 8-K

Due to a bill payment strategy shift in the "Consumer Ecosystem Group" during the third quarter, Intuit took $263 million in GAAP losses. Although small business online ecosystem revenue increased 20%, with customer acquisition behind the growth, operating income from this group has fallen behind guidance.

In Millions of USD (except for per share items)

3 months ending 2015-01-31

3 months ending 2014-10-31

3 months ending 2014-07-31

3 months ending 2014-04-30

Revenue

808.00

672.00

714.00

2,388.00

Other Revenue, Total

-

-

-

-

Total Revenue

808.00

672.00

714.00

2,388.00

Cost of Revenue, Total

206.00

175.00

179.00

170.00

Gross Profit

602.00

497.00

535.00

2,218.00

Selling/General/Admin. Expenses, Total

494.00

405.00

376.00

533.00

Research & Development

200.00

200.00

210.00

186.00

Depreciation/Amortization

6.00

6.00

6.00

5.00

Interest Expense(Income) - Net Operating

-

-

-

-

Total Operating Expense

906.00

786.00

771.00

894.00

Operating Income

-98.00

-114.00

-57.00

1,494.00

Other, Net

0.00

-2.00

-

-

Income Before Tax

-103.00

-121.00

-41.00

1,489.00

Income After Tax

-66.00

-84.00

-29.00

984.00

Minority Interest

-

-

-

-

Equity In Affiliates

-

-

-

-

Net Income Before Extra. Items

-66.00

-84.00

-29.00

984.00

Net Income

-66.00

-84.00

-29.00

984.00

Preferred Dividends

-

-

-

-

Income Available to Common Excl. Extra Items

-66.00

-84.00

-29.00

984.00

Dilution Adjustment

-

0.00

-

-

Diluted Weighted Average Shares

285.00

286.00

285.00

290.00

Diluted EPS Excluding Extraordinary Items

-0.23

-0.29

-0.10

3.39


This may be due in part to small business revenue declining 5% for the quarter. This was in line with expectations and reflected the anticipated changes in desktop offerings that resulted in ratable revenue recognition. Consumer tax revenue grew 4% in the third quarter and 9% year to date. In comparison, the company's ProTax offering felt a 61% decline revenue.

Inuit ended the third quarter with $2.1 billion in cash and investments. The company also indicated a buyback program for the common stock, repurchasing $568 million in shares in Q3. Board members agreed to an additional $2 billion in buyback authorization. The company now has $2.6 billion in authorization remaining.

To fuel short-term fears, for the current fourth quarter, Intuit expects a far deeper loss of $0.10-$0.12 per share. Also expected to be bleak, revenue will decline to levels between $720 million-$745 million.

Per Share Data

Annuals (Year End)

TTM

Quarterly

Fiscal Period

Jul12

Jul13

Jul14

Apr15

Apr15

Revenue ($)

12.49

13.77

15.48

15.42

7.78

EBITDA

4.69

4.86

5.30

3.13

3.43

EBIT

3.83

4.07

4.52

2.27

3.21

Free Cashflow

3.44

3.82

4.28

4.90

4.99

EPS ($)

2.60

2.83

3.12

1.16

1.78

EPS (w/o Non-Recur. Items) ($)

2.51

2.72

2.96

1.16

1.78

Dividends

0.60

0.85

0.76

0.94

0.25

Book Value

9.29

11.79

10.80

8.42

8.42

The company may be buying back shares at a much lower price than current market conditions have afforded. Although the company remains a strong competitor to its peers, the recent losses may drive the price of shares down 22%.

How crowded is the cloud?

Cloud-based services have been the focus for much of the company's future growth. Intuit's online business grew 13% during the last tax season, along with 9% from U.S. TurboTax customers. Online payments volume grew 19%. This was said to be due to an increase in charge volume per customer.

The service group now boasts 965,000 paying subscribers worldwide. QuickBooks totaling paying customers grew 20%. Now with over 150,000 QuickBooks online subscribers outside the United States, this customer base has jumped 140%.

Comparable Companies: Yahoo Finance

(Assuming the same growth rates and discount rate)

Company

Intuit Inc. (INTU)

Salesforce.com Inc (CRM)

SciQuest Inc (SQI)

Red Hat Inc (RHT)

Adobe Systems Inc (ADBE)

Dassault Systemes SA (OTCPK:DASTY)

Industry

Software - Application

Software - Application

Software - Application

Software - Application

Software - Application

Software - Application

Price

$105.16

$72.68

$15.40

$77.97

$80.09

$79.01

Market Value ($mil)(Foreign currencies normalized to US$)

$28,998

$47,678

$422.66

$14,387

$40,102

$19,824

Enterprise Value ($mil)(Foreign currencies normalized to US$)

$27,523

$48,172

$295.32

$13,839

$38,826

$16,425

Revenue (MIL)

$4,506

$5,374

$101.93

$1,789

$4,147

$2,494

P/E (TTM)

91

0

0

80.60

132.50

60.30

P/S

6.90

8.30

4.10

8.30

9.60

7.80

P/B

12.60

11.40

2.30

11.10

6

5.70

EV/EBIT

45.02

0

0

55.60

76.47

36.93

EV/Sales

6.53

8.71

2.90

7.77

9.11

6.97

Yield (%)

0.90

0

0

0

0

0.70

Payout

0.84

0

0

0

0

0.35

ROA (%)

6.10

-1.68

-0.18

5.43

2.89

6.39

ROE (%)

11.57

-4.39

-0.26

12.67

4.59

10.80

Operating Margin (%)

14.52

-1.05

-1.15

13.97

11.91

18.87

Net Margin (%)

7.34

-2.86

-0.41

10.07

7.20

12.57

Debt to Equity (%)

22

25

0

56

29

11

10-Year Rvn. Growth (%)

12.70

33.90

12.20

25.50

10

9.50

10-Year Earning Growth (%)

13.90

0

0

15.90

-2.80

7.30

5-Year Rvn. Growth (%)

9.90

28.50

10.40

19.60

6.60

10.40

5-Year Earning Growth (%)

17.40

0

0

16.50

-12

11.10

1-Year Rvn. Growth (%)

1.20

23.20

-7.90

18.30

6.20

17.40

1-Year Earning Growth (%)

-60.10

0

0

5.40

13.20

-7.70

To compare the rate of growth for Intuit, I am using the current TTM EPS of $1.16. I also represent a fixed 10-year earnings growth rate of 13.90%. This model applies a 4% terminal growth rate and a discount rate of 12%. Data for calculations from: Gurufocus.com

INTUIT Growth Rate: 37.70%

HRB Growth Rate: 8.84%

ADP Growth Rate: 18.29%

Revenue Growth Rate:

· 12.70% (10y)

· 9.90% (5y)

· 1.20% (1y)

EBITDA Growth Rate:

· 14.50% (10y)

.12.20% (5y)

· -40.50% (1y)

Earnings Growth Rate:

· 90% (10y)

· 17.40% (5y)

· -60.10% (1y)

Free Cash Flow Growth Rate:

· 13.40% (10y)

· 17.50% (5y)

· 21.30% (1y)

Book Value Growth Rate:

· 10.20% (10y)

· 7.20% (5y)

· -26.10% (1y)

Revenue Growth Rate:

· -0.40% (10y)

· -2.30% (5y)

· 23.60% (1y)

EBITDA Growth Rate:

· -0.10% (10y)

· 1.80% (5y)

· 118.90% (1y)

Earnings Growth Rate:

· 2.80% (10y)

· 3.50% (5y)

· 160.00% (1y)

Free Cash Flow Growth Rate:

· 0.00% (10y)

· -3.80% (5y)

· -2.60% (1y)

Book Value Growth Rate:

· -1.20% (10y)

· 4.80% (5y)

· 92.60% (1y)

Revenue Growth Rate:

· 9.00% (10y)

· 8.10% (5y)

· 23.20% (1y)

EBITDA Growth Rate:

· 6.60% (10y)

· 4.40% (5y)

· 30.60% (1y)

Earnings Growth Rate:

· 10.00% (10y)

· 4.20% (5y)

· 32.00% (1y)

Free Cash Flow Growth Rate:

· 5.60% (10y)

· 1.90% (5y)

· 15.00% (1y)

Book Value Growth Rate:

· 4.00% (10y)

· 5.30% (5y)

· -20.10% (1y)

Previously, Intuit was demonstrating a trend of strong EPS growth. This has given rise to a fundamentally sound company. A strong 5-year average return on shareholder equity, significantly better than the industry.

INTU

ADP

HRB

SGPYY

Industry

Market Cap:

29.54B

40.76B

8.83B

N/A

N/A

Employees:

8,000

61,000

2,200

12,975

98.00

Qtrly Rev Growth (yoy):

0.03

0.07

1.55

0.07

0.00

Revenue :

4.58B

12.79B

3.34B

2.08B

N/A

Gross Margin :

0.85

0.49

0.54

0.94

0.66

EBITDA :

1.40B

2.74B

1.21B

590.97M

N/A

Operating Margin :

0.27

0.19

0.32

0.26

-0.13

Net Income :

805.00M

1.61B

671.00M

306.06M

N/A

(Gurufocus)

Valuation

In order to valuate INTU, consideration must be to given using conservative models of future forward-looking guidance. During the Q3 earnings event, the company reiterated revenue guidance for the fourth quarter and raised revenue guidance for 2015. In regards to the best value for returns on future earnings, I have adjusted my entry target based on the likelihood of a number of bearish events that could occur during the next revenue generation cycle.

Growth Value: $48.32

Terminal Value: $35.42

Target Entry: $86.3

Current Price Margin Of Safety: -22%

At the time of writing, the market price matched my valuation metric almost to the dollar. I believe this is a sign that the stock is due for a pullback. For example, for the fiscal year 2015, Intuit expects revenue of $4.395 billion-$4.420 billion, a slight increase compared to previous guidance. To reflect the current growth, I have adjusted this variable in my calculations.

This leads me to believe that the market has already priced these earnings in at the rate of expected growth:

10-Year Growth Value 37.90X = $42.9

10-Year Terminal Value 4X = $62.65

Estimated Current Value: $105.56

Margin Of Safety: 0%

Conclusion: I feel that the best value in the future growth of the company will come to the patient investor. A pullback to $85 per share could justify an entry for a long position, if the company continues to outperform its peers.

I do feel that the current share price is resting on a particularly risky transition point. I estimate that the EPS is overvalued by at least $0.01. I use the same method to determine the current share price and discover Intuit trades well above what I believe is the fair value. Today's price of INTU seems to be heavily vested in future returns.

PS Ratio (3 years Avg)

4.982 × Sales per Share

15.91 = PS Method Valuation 79.26

Some indications point to a future that expects EPS to double by April of next year. The company has risked shareholder equity in the form of stock buybacks. Though this may seem like an opportunity to short the stock, the strong financial history mixed with the intended share buyback is a signal the company expects to outperform its peers. A period of some correction could be expected in the near-term future, as the expected earnings have already been priced into INTU.

25.58 × Earnings per Share

2.768 = PE Method Valuation 70.82

Yet in another interesting turn of events, at the time of writing, a surge of insider sales was reported.

(Yahoo)

May 26, 2015 GREENE DIANE B Director 30,000 Direct Sale at $104.70 per share. 3,141,000
May 26, 2015 STANSBURY HENRY TAYLOE Officer 2,705 Direct Option Exercise at $56.52 - $63.11 per share. 162,0002
May 26, 2015 GREENE DIANE B Director 30,000 Direct Option Exercise at $30.57 per share. 917,100
May 26, 2015 KANGAS EDWARD A Director 10,000 Direct Option Exercise at $29.23 per share. 292,300
May 26, 2015 KANGAS EDWARD A Director 14,341 Direct Sale at $104.56 - $104.78 per share. 1,501,0002
May 26, 2015 STANSBURY HENRY TAYLOE Officer 2,705 Direct Automatic Sale at $105.55 per share. 285,512

I expect that any setback in achieving preset guidance may incite bearish sentiment. This, however, will give excellent value to investors seeking long-term gains. My logic being that when calculated with the most optimistic EPS estimates for 2017 ($4.04), future losses will bring pressure to the shares. This may threaten shareholder equity nearly 20%.

The company expects that the short-term effect of the upcoming Q4 report to be bearish. Guidance indicated that the company expects GAAP diluted EPS of $0.88 to $0.90, a significant loss versus previous guidance of $1.70 to $1.75.

This is in contrast to Non-GAAP diluted EPS, where guidance grew slightly, $2.50 to $2.52, versus previous guidance of $2.45 to $2.50.

Annual Rates (per share)

10 yrs

5 yrs

12 months

Revenue Growth (%)

12.70

9.90

1.20

EBITDA Growth (%)

14.50

12.20

-40.50

EBIT Growth (%)

15.40

16.50

-49.80

EPS without NRI Growth (%)

13.90

17.40

-60.10

Free Cash Flow Growth (%)

13.40

17.50

21.30

Book Value Growth (%)

10.20

7.20

-26.10

The expected growth of Intuit's cloud services, through its recent acquisition and cloud-based user growth, leaves reason to believe that there is little to capture but short-term downside at the current market level.

Company

Industry

Return on Equity %

5-Year Average

35.08

25.80

13.66

19.74

Return on Assets %

5-Year Average

16.16

14.80

7.13

10.59

Return on Capital %

5-Year Average

29.50

21.20

10.14

16.01

Growth investors will appreciate that in comparison to the industry, Intuit's current ROE is up more than 10% from its 5-year average.

Price Ratios

Company

Industry

Current P/E Ratio

36.10

89.29

P/E Ratio 5-Year High

36.87

640.79

Price/Sales Ratio

6.34

5.21

Price/Book Value

11.75

5.29

Price/Cash Flow Ratio

18.73

27.47

Because of the company's strong history and solid book sheet, I anticipate that any shares purchased near $85 will give value-focused investors an excellent entry. However, until the stock returns to a more conservative level, I believe INTU is a "two-leg" trade. This has presented investors with the opportunity to short on the idea that the company is currently overvalued.

This article was written by

Aaron Faulkner profile picture
353 Followers
Since joining Seeking Alpha, A.M. Faulkner has used his humble beginnings into the world of financial investing to educate and inform. This approach of helping the most vulnerable among us to make wise decisions, explore the risk, and love the free-market, has helped this young upstart to transition from a fledgling analyst into a formidable advocate of disruptive technologies, decentralized and unregulated economies, as well as worthy cryptocurrency projects. in 2016, Aaron worked as a consultant for one of his followers here. This lead to Mr. Faulkner to co-found Copacetic, LLC, a technology firm developing digital currency applications for non-profits, religious organizations, and communities. Having experienced the "great bitcoin bubble" of 2017 firsthand, He then joined Holochain lead a successful and ethical ICO  as a copywriter and consultant. Despite the speculative rise and fall of crypto assets, Aaron continued to cultivate the emerging markets to help list HoloToken($HOT) on the world's largest cryptocurrency exchange, Binance. His efforts would help to overtake more than 10,000 other digital assets, placing $HOT in the top #50 global marketcaps.     It all began here for me, and I am grateful to have the leisure to return....
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Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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