Intuit's Shining Star
By Scott Kessler
Of the world's four largest software developers, Intuit's (INTU ) stock was the only one to gain ground in 2002. While the S&P 500-stock index fell 23.4% last year, Intuit shares rose 9.7%. Intuit was also up in 2001, despite a down market. Clearly, the developer of market-leading software products such as TurboTax (tax preparation), QuickBooks (small-business accounting), and Quicken (personal finance), is doing something right.
On Jan. 8, S&P upgraded Intuit from hold (3 STARS) to accumulate (4 STARS), based on our belief that the stock could appreciate notably over the next six to 12 months. Intuit is the No. 4 software company based on market capitalization after Microsoft (MSFT ), Oracle (ORCL ), and SAP (SAP ).
S&P believes Intuit's stock has outperformed its peers and the broader market primarily because of an impressive record and prospects for growth and margin expansion -- notwithstanding an uncertain economic backdrop. Although Intuit's sales increased a healthy 18%, to $1.36 billion, in fiscal year 2002 (ended July), S&P expects the software maker to exceed this performance in its current fiscal year. We're projecting fiscal-year 2003 revenue growth of 30%, to about $1.77 billion, fueled by QuickBooks and other small-business offerings, and TurboTax and professional tax products and related services.
S&P estimates that in fiscal year 2003, the company will spend about $632 million (about a quarter of its revenue) on research and development to improve existing products and launch new ones, and on sales and marketing. Nevertheless, S&P projects that gross, operating, and net margins will widen, reflecting favorable unit trends, increased leverage, and improved cost-controls and efficiencies.
CEO Steve Bennett has implemented new and effective business processes and priorities since arriving in January, 2000 from General Electric (GE ). Bennett has adroitly adjusted Intuit's business mix, making it more of a pure-play software company and capitalizing on market opportunities through acquisitions.
Bennett also has installed a talented management team. In fact, the managers responsible for what S&P believes are the company's two most important businesses, small business and consumer tax, are former GE subordinates. Bennett also recruited the company's head of direct marketing and sales. And on Jan. 3, the company named a new CFO, Robert "Brad" Henske, who has important experience managing a software company that successfully completed several significant acquisitions.
Tax season is not a happy time for most Americans, but that's not the case for Intuit. S&P expects it to get 76% of revenues, and more than all of its profits, between November and April (we believe the company will report losses in its other two quarters). S&P believes the company will have its best-ever tax season this year, in great part because of its leadership position in the tax-preparation software category in terms of revenues and units.
Intuit recently introduced a slew of new TurboTax products, including versions specifically designed for Spanish speakers, investors, and those planning for retirement. And since late in 2002, it has been mailing to prior TurboTax purchasers a new version of the software with a special product-activation feature. S&P expects this will result in more TurboTax users, due both to increased conversion rates of busy and forgetful folks (who may not otherwise have bought the product) and reduced potential for software piracy and sharing. S&P also expects Intuit to gain market share as a result of its recently-announced plan to offer free electronic tax preparation and e-filing to more than 60% of U.S. taxpayers.
At a recent 32 times S&P's calendar year 2003 earnings estimate, Intuit traded at a slight premium to the S&P 500 Software Industry's p-e of 30. However, the company's p-e-to-growth multiple of 1.3 (using a projected annual growth rate of 24%) was some 30% below its peers' and actually lower than that of the S&P 500.
Using discounted cash-flow analysis , S&P estimates the stock's intrinsic value at $58 to $59, about 22% above its Jan. 17 closing price of $48.29. Based on Intuit's three-year price chart, the stock is in a nice uptrend, and has nice support from $41 to $45. With excellent products, market leadership, talented and aggressive management, a solid balance sheet, and an attractive valuation, S&P recommends purchase of the stock.
Analyst Kessler follows Internet software and services stocks for Standard & Poor's