Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Earlier this year, I made the argument that tax-prep powerhouse H&R Block (HRB -0.53%) was one of the best dividend stocks on the market. Investors in rival tax prep software firm Intuit (INTU -0.14%) probably weren't happy to hear that -- but they'll be even less pleased with today's news: Investment banker Raymond James just downgraded Intuit to sell.
Here are three things you need to know about that.
Image source: Getty Images.
1. From neutral to sell
Technically, what Raymond James did this morning was announce a downgrade of Intuit stock from market perform to underperform, which basically translates as from neutral to sell. More important than just the rerating itself, though, is why Raymond James is downgrading.
Last we heard, Intuit was still the giant of do-it-yourself income tax preparation, commanding as much as a 62% share of the market. But as explained in a write-up on TheFly.com this morning, Raymond James worries that Intuit's "tax business is becoming more challenging to grow." Analysts on average predict that Intuit's sales for this current quarter will be up, but its profits will be down year over year. So even if Intuit succeeds in growing its sales, the worry is that "maintaining 60% operating margin will be difficult."
2. What's wrong with the tax biz?
Why are margins becoming a concern for Intuit? Competition, for one thing -- specifically, competition from H&R Block. In the 2017 tax filing season, Intuit reported flat market share in tax software. H&R Block, on the other hand, reported 6.8% sales growth, and increased market share. And with H&R Block competing so strongly, Intuit may find it difficult to continue its historical practice of consistently raising the price on its tax software.
Intuit has only itself to blame for this.
In 2015, Intuit instituted a controversial price increase on TurboTax tax prep software packages, removing certain tax forms that used to be contained in the cheaper TurboTax Deluxe edition, and shifting them into the more expensive TurboTax Premier edition instead. This forced customers, who need to file those forms, to buy the more expensive package. The move elicited "anger and distress" (Intuit's words) from its customers, and forced the company to backtrack, handing out $25 rebates to disgruntled customers.
This didn't prevent Intuit from raising prices again in 2016, of course. But in Raymond James' view, Intuit will not be able to raise prices again this year -- not if it hopes to keep H&R Block at bay.
3. What else is wrong with Intuit?
At the same time, Raymond James argues that "Intuit's strategy of lower-priced service offerings for self-employed and international QuickBooks Online subscribers is working." However, the company needs to make "increased investments in order to maintain the status quo," Together, the lower prices on QuickBooks, combined with higher costs, are likely to result in "lower margins" for Intuit, warns the analyst.
What it means for investors
All this being said, Raymond James' warnings ring a bit hollow in light of the numbers Intuit has been putting up. Lower-priced offerings in QuickBooks, for example, still leave Intuit earning a 41.4% operating profit margin (per S&P Global Market Intelligence data) in its small business division -- not as good as the 65% operating profit margin that Intuit earns in consumer tax, admittedly, but still not too shabby.
And if Intuit's TurboTax business may have difficulty growing, that probably owes at least in part to the fact that it's grown so large already, with revenue up more than 30% over the past five years -- significantly ahead of growth in the population of taxpayers. Despite the TurboTax debacle of 2015, and despite the rebates Intuit had to pay out because of it, Intuit still grew its TurboTax business 8% that year -- and nearly 10% in 2016.
Long story short, despite all the shade Raymond James is throwing Intuit's way today, business is still pretty darn good at Intuit. And yet, I still actually disagree with a lot of my fellow Fools, and agree with Raymond James' main point: Intuit stock is a sell.
Why? Simply put, Intuit stock costs too much. Priced at nearly 39 times earnings today, Intuit stock is pegged for no more than 15% long-term earnings growth by Wall Street analysts. With a stock price so clearly overvalued, I can't really blame Raymond James for grasping at straws and trumping up reasons to sell the stock. Still, the fact remains: The reason Intuit stock is a sell is because it costs too much, not because its business is bad.
