|Shares Out. (in M):||260||P/E||31||27|
|Market Cap (in $M):||35,088||P/FCF||24||23|
|Net Debt (in $M):||-1,093||EBIT||1,722||1,935|
|Borrow Cost:||General Collateral|
Intuit shares, currently trading at $135 or 31x current fiscal year’s estimates, are at the high end of their recent multiple trading range despite looming risk in their largest business segment. After posting better than feared results during the 2017 tax season, focus shifted back to the growing Small Business segment and the stock climbed to new highs. As we get closer to the 2018 tax season, however, I believe sentiment will shift back to the tax business and the stock will come under pressure.
The Company breaks down its operations into three segments: Small Business (mainly Quickbooks), Consumer Tax (Turbo Tax) and Professional Tax. The Consumer Tax business is the largest and most profitable segment, contributing over 50% of operating profits before corporate overhead (and over 80% when accounting for overhead). It currently generates segment operating margins over 65% while the faster growing Small Business segment, which contributes just under 40% of combined segment operating profits, generates margins of around 40%.
Consensus numbers currently forecast high single digit revenue growth in the fiscal year ended 7/18, driven by 11% revenue growth in the Small Business segment and 6.5% growth in the Consumer Tax segment. The street also expects margins to expand 120bps leading to 15% EPS growth, including some share buybacks. Based off of recent history these numbers might make sense and can possibly justify the valuation but in order for the stock to work from here I think you likely need continued upward revisions. In addition, recent changes in the competitive environment for the tax segment put estimates at risk.
Over the past several years do-it-yourself e-filings have taken share from other types of tax filings. According to IRS tax statistics, overall filings grow anywhere from 0-2% every year while self-prepared e-filings have grown mid-single digits, until this year. In 2017 cumulative returns fell 50bps and self-prepared returns only grew 30bps. While the exact cause of the declines isn’t known (speculation ranges from missed deadlines resulting from new security measures to lower filings from undocumented immigrants on account of the political climate), the important factor may not be the overall level of filings growth but the slowdown in outperformance of DIY e-filings. Their share only grew marginally this year while it averaged 150bps over the past four years. While overall IRS filings growth will likely resume next year, losing the mix shift tailwind will make it more difficult for Intuit to hit street estimates.
H&R Block presents another headwind. For several hears HRB was content to protect their fleet of company owned and franchised tax prep locations by raising prices and ceding share. Assisted filings have fallen for five years straight while online delivered inconsistent performance. In 2017, however, HRB stated that they would change the growth trajectory of their filings and began discounting offerings and rolling out new products. As a result, online filings grew 3.5% in 2017 and they regained some lost share of DIY filings. Although HRB is currently looking for a new CEO, I would guess that growing their share of online filings will remain a key part of the strategy for 2018.
Intuit was able to post close to 10% consumer tax growth in 2017 but that came on the heels of a mix shift benefit that drove revenue/filing up over 6%. It is possible that this trend continues but given the aggressive commentary from HRB, pricing could be at risk next year. Looking back at the 2017 tax season, INTU stock traded down from over $125/share to $116/share on fears that tax forecasts were at risk. I see the potential for that fear to reenter the valuation as we progress through the remainder of this year. If HRB is able to win back additional share next year, I see the stock trading closer to $100/share which is still 20x next fiscal year’s earnings estimates.
Earnngs heading into tax season 2018