Intuit's Perfect Intuition

Well, I suppose now you expect me to gloat. To crow: "I told you so." To exult that I correctly predicted on Monday that Intuit's (Nasdaq: INTU  ) earnings would be great. No thanks.

After all, it's not as if I had any great insight into the numbers. Intuit itself told us that the quarter would be wonderful. It was plain as day to anyone who could read between the lines. On April 17, management reported that sales of TurboTax "Web units" had soared 37%. And we already knew that the margins on such e-sales were terrific. So it stood to reason that yesterday's results would look superb.

How superb?
This superb: Sales grew 15% in comparison with the third quarter of 2007, while profits leapt 28% to $1.33 per share. As I predicted, profit margins continued to expand, with Intuit tacking 60 basis points onto the 50.8% operating margin it boasted in the year-ago quarter. This improvement narrows the margins lead held by Jackson Hewitt (NYSE: JTX  ) and Paychex (Nasdaq: PAYX  ) -- which compete with Intuit for tax and small-business revenues, respectively -- and it expands Intuit's lead over H&R Block (NYSE: HRB  ) and ADP (NYSE: ADP  ) .

Based on these numbers, CEO Brad Smith promised shareholders "another year of double-digit revenue and earnings growth for Intuit." With less than three months remaining in the fiscal year, that seems a pretty safe bet. Also a safe bet: Smith's guidance of $3.05 billion to $3.06 billion in revenue, and about $1.43 per share in profits.

Valuation
Now let's assume that Intuit gets where it says it's going. How does the price look? Assuming Intuit holds on to the bump in stock price it received last night after earnings were released, we're now looking at a stock priced at $28.55 and expected to earn $1.43 per share. So the market is pinning a tail on a donkey with a price-to-earnings ratio of 20.

With analysts predicting that Intuit will grow at just 15% per year in the long term, that may look a bit pricey, but consider: Over the past nine months, Intuit has generated $652 million in free cash flow -- about 21% more cash profits than it reports in net income under GAAP. What this tells me is that although Intuit is still no bargain, it's not nearly as overpriced as it looks at first glance.

With Intuit's business only getting stronger, I'd suggest you keep a sharp eye out for unjustified price drops. My intuition tells me that anything much cheaper than 10% south of where Intuit trades today -- say $25 or so -- would be a great chance to buy.

Check out how well Intuit's been doing recently in:

Jackson Hewitt is a Motley Fool Hidden Gems Pay Dirt and Motley Fool Inside Value recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Rich Smith owns shares of Jackson Hewitt. You don't have to intuit The Motley Fool's disclosure policy. You can read it for yourself.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 649765, ~/Articles/ArticleHandler.aspx, 11/22/2014 4:34:17 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement