The words "financial products" have a tantalizing sound to investment writers like me. There's just a sense of completeness in writing about good investments, then using those products to track them. Intuit (NASDAQ:INTU) is the leading producer of software financial products, selling brands such as QuickBooks, Quicken, and that annual favorite, TurboTax. Without further ado, let's take a closer look at Intuit, as both a company and a stock.
Intuit's business is quite seasonal -- the majority of the revenues appear in the third fiscal quarter, corresponding to tax season (their fiscal year ends July 31). This isn't altogether suprising, since Consumer Tax and Professional Tax products account for 41% of revenue. QuickBooks-related services and Small Business services, both of which include payroll handling and tax-form preparation, account for another 48%. But I was surprised that the Other Products division, including what I felt was the company's flagship product, Quicken, provides only 11% of revenue.
Contributing significantly to Intuit's continuing relevance, the company's taken a page from Microsoft's (NASDAQ:MSFT) playbook, bringing out new versions of their major software products Quicken and QuickBooks every one to two years. By retiring online financial support for older versions -- Quicken 2003 is next, later this year -- they ensure themselves a continual revenue stream as users upgrade.
Competitors include Paychex (NASDAQ:PAYX) and Automatic Data Processing (NYSE:ADP) in payroll services, Microsoft in personal finance tracking and small business accounting products, and H&R Block (NYSE:HRB) in tax preparation products.
For those wondering, competition can come to blows. Intuit and H&R Block are currently embroiled in a legal battle over some of Intuit's advertisements. H&R Block had obtained an injunction preventing the showing of advertisements claiming that "more returns were prepared with TurboTax last year than at all the H&R Block stores." In response, Intuit has challenged H&R Block to publicly provide total numbers from last year, saying that conflicting numbers have only been provided so far. This is high-stakes poker, and the winner might stand to walk away with a large portion of a lucrative bounty.
Option dilution (which may result in share count dilution or repurchases that fail to add shareholder value on a long-term basis) is always a worry, especially for a software company. However, counting all granted or available options, Intuit has maintained less than 3% potential dilution (per period) for the last three years. That's less than optimal, but it's not particularly bad given the company's growth prospects. In addition, the company has been vigorously repurchasing shares, reducing the outstanding share count by slightly more than 10% in the last two fiscal years.
Intuit's return on invested capital, ROIC, has been dramatically improving over the past few years, from 5.3% in FY 2002 to 21.7% for the trailing-12-month period. It's gone from destroying value in FY 2002 to creating value during the past couple of years. If Intuit can continue this trend, it should prove to be a good investment, depending on the purchase price.
Speaking of which, let's quickly look at some valuation metrics. The trailing-12-month (ttm) P/E ratio is 21.7, compared to a three-year average of 28.3 and the S&P 500's 19.1. The PEG ratio (forward P/E divided by Thompson First Call's expected growth of 15%) is 1.26. Since "1" represents fair value, that's just more than fair by PEG standards. That said, P/E comparisons are generally rough, often based on relative comparisons. Therefore, I'd advise a look at a discounted cash flow or another more detailed valuation metric before forming a hard-and-fast opinion.
Intuit's main tax-preparation competitor, H&R Block, has a TTM P/E of 12.4 and a PEG of 0.84; its main payroll services competitor, Advanced Data Processing, has a 25.1 P/E and a 1.73 PEG -- probably overvalued.
In and of itself, I wouldn't call Intuit's higher P/E, compared to H&R Block's, a cause for concern. Intuitis a software company first and foremost, enabling it to achieve accordingly higher returns on marginal investment. For that matter, it's able to scale costs across sales much more easily. I'd say this provides some potential for outperformance relative to earnings targets, particularly if sales numbers continue to show strength. For those seeking a company operationally closer to Intuit (for purposes of comparing P/E), I'd look toward Microsoft or other software brethren with similar growth expectations and operational makeups.
I'd advise you to put Intuit on your watch list. You might want to look a little closer at the valuation and capacity for outperformance, given growth already priced into the stock. Keep watching to see if Intuit can continue to grow ROIC, then wait for a pullback in price.
For more intuitive Foolishness:
- Intuit's Outlook Isn't the Problem
- Foolish Forecast: Trust Your Intuit-ion
- Intuit-ion Wins Again
- Intuit's Free Tax Filing Gamble
Intuit and Microsoft are Inside Value recommendations.
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Fool contributor Jim Mueller uses Intuit's Quicken and TurboTax, though he decided to give H&R Block's TaxCut a try this year. He does not own shares in any company mentioned, though his wife owns shares in Microsoft. The Motley Fool is investors writing for investors.
