The Upside To Intuit: How Short-Term Loss May Turn Very Profitable
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) | |||||
Industry | ||||||
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
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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.
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
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.