|Shares Out. (in M):||284||P/E||27.0x||21.0x|
|Market Cap (in $M):||23,000||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-1,000||EBIT||1,100||1,440|
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I don't expect this write-up to get amazing marks as INTU is more of a “GARP” name than a traditional value name and given the stock chart, it doesn’t appear completely out of consensus. However, I believe that there is definitely some controversy around this name (INTU was just touted as SZ’s top short write-up of the week) that causes disconnects from time-to-time, especially during tax season, which generally creates buying opportunities, though I’m happy to own it in size at its current valuation.
At a high-level, I believe the company is an earnings compounder than can be owned through the cycle. It has solid growth prospects, a very strong and shareholder-friendly management team, difficult to dislodge products, attractive margin characteristics/trends and trades at a reasonable valuation both on an absolute and relative basis. For the tech-minded, this is a cheap way to play the shift from on-premise to SaaS which is not disruptive in the near-term and will drive upside in the long-term. Finally, I believe this company is on the verge of accelerating revenues that will lead to multiple expansion. There are a lot of nuances to this story and this write-up is meant to be more high-level…please feel free to ask any questions for those who would like to drill down further.
Intuit sells business/financial management software that handles such functions as accounting, tax preparation, payroll and payments to a wide breadth of SMB customers and consumers throughout the US. Its brands/products include TurboTax, QuickBooks, DemandForce, GoPayment, Quicken, Mint.com and a number of others. The company serves over 5M SMB customers and over 62M tax filers. Earnings are highly seasonal as tax preparation is 45%/55% of revenues/operating income, so tax season (Jan-Apr) is generally a fairly volatile period and most of their revs/earnings occur in their fiscal Q3 (1/31-4/30).
INTU is a very innovative company with an excellent competitive moat, but its multiple has been generally compressed relative to history (used to trade at 25x+ with a similar growth profile as I expect going forward) for a few reasons: half of the company’s revenue is exposed to the SMB segment of the economy, which has been fairly stagnant macro exposure for the last several years, software as a category has become more penetrated within the tax preparation world and hence revenue has slowed and competitive concerns, which I will address later.
Ultimately, I think that despite these issues, this is a low double-digit top-line growth business with operating leverage and strong capital returns in the form of share repurchases and dividends, which will drive the bottom-line total returns by 15-20%+. This is ahead of what the Street expects and represents an acceleration going forward. This type of setup with this type of business should result in multiple expansion (even from here), which provides plenty of upside into the triple-digits from here. Growth drivers include:
Recently the stock has been strong on the back of solid results within their tax business, which I believe validates their strategy and also sets them up to outperform not only this year, but next year as well. Despite the fact that I couldn’t get around to completing the write-up after the stock sold off on their preannouncement in mid-February, I think this it is timely as tax season generally creates a lot of noise for this name, and I believe one should add on any tax-related weakness. I believe the TurboTax brand will continue to be strong for years to come and any tax-related sell-off provides a cheaper point to buy what I view as the real asset, which is their cyclically depressed SMB segment right after a significant product launch that should drive increased customer uptake and an acceleration in growth.
While the valuation isn’t overly cheap (21x FY14 Non-GAAP EPS, 21x FY 14 FCF, 12x FY14 EV/EBITDA), it is trading well within its historical ranges and given my view that overall growth should be similar to recent years going forward (and could actually accelerate), I believe that this a good entry point.
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