Taking Stock: Intuition Says Intuit May Not Be A Bargain - InformationWeek
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William Schaff
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Taking Stock: Intuition Says Intuit May Not Be A Bargain

Growth prospects have affected the company's stock price this year.

We're almost halfway through the year, and technology stocks have gone nowhere. Well, that's not entirely true. First, the Nasdaq composite was up 7.5% in late January, in a continuation of the strong bull market of 2003. Then came the sell-off as interest rates rose from very low levels. Some stocks have performed considerably worse, though. Intuit falls into this category, after declining almost 27% so far this year. Is that opportunity my cynical bloodhound nose smells?

Most readers know Intuit as the company behind TurboTax and Quicken, but there's more to the story. Intuit generated $1.7 billion in net revenue last fiscal year from six business segments: Small Business Products and Services (QuickBooks Do-It-Yourself Payroll, financial supplies, and IT management software), 27% of revenue; Consumer Tax (TurboTax and online tax preparation), 26%; Professional Accounting Solutions (professional tax preparation software), 15%; QuickBooks (accounting software for small businesses), 15%; Vertical Business Management Solutions (four recent acquisitions focused on providing business-management software in select industries), 6%; and other businesses (Quicken, Quicken.com, and Intuit's Canadian division), 11%.

For the most part, Intuit has shown strong revenue growth in the last 10 years. Revenue increased 20% in 2002 and 26% in 2003, both very respectable numbers. Historically, Intuit as had more trouble generating consistent growth in earnings per share because of erratic and low margins. It has done a good job of improving on this in the last couple of years, with operating margins increasing from --1.1% in 2000 to 23.4% last year. Intuit generates a prodigious amount of cash from operations. Last year, this number reached $910.8 million. This has resulted in Intuit's sitting on a $1.2 billion cash hoard, about $6 per share. The company has decided to use this cash to repurchase shares; last year it bought back $658.5 million worth of shares, more than offsetting any dilution from options.

In my opinion, growth prospects have gotten to Intuit's stock price. Previously, management had indicated that it expected to generate 15% or better revenue growth and 20% or better EPS growth. In conjunction with its latest earnings release, Intuit said it now expects only 7% to 9% revenue growth and EPS growth of 15% to 20%. The lower revenue growth is likely a result of the company's businesses maturing, but I believe management also could be setting the bar low. In my opinion, EPS growth at double the rate of revenue is not sustainable in the long term. At some point, margin expansion stops, and you can't buy back shares indefinitely.

So is the stock cheap after the almost 27% decline? In my book, not really. My model shows that the company is trading around its fair value and, on a price-to-earnings basis, is trading at 20 times the July 2005 consensus estimate, which isn't particularly appealing either. It looks as if this bloodhound has to go sniffing for some- thing else from the bargain bin.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.

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