Wednesday, May 17, 2006

Intuit: An Accounting Software Goliath

Personal accounting software giant Intuit (INTU) reports 3Q results later today. Intuit is expected to report a higher profit on a 13% climb in revenue thanks to robust demand for its TurboTax software, which is used by customers to file tax returns. Analysts are looking for the company to report EPS of $1.76, up from $1.53 a year ago. If Intuit's not in your portfolio yet, we think it should be. Here's a quick look at what the stock has to offer investors.

Description Intuit provides business and financial management solutions for small businesses, accounting professionals and consumers. The company offers products and services in five business segments. It also offers financial supplies, such as paper checks, envelopes, invoices, deposit slips, stationery and business cards designed for small businesses and individuals, mainly in the US. Intuit generated over $2B in sales last year.

Positive Considerations Intuit's software products have become household names: Quicken for managing personal finances, TurboTax for preparing tax returns, and QuickBooks for small-business accounting. Years ago, Microsoft tried to buy the firm, but it was blocked for antitrust purposes. Too bad for Microsoft. Intuit dominates its core markets and rewards shareholders through generous stock buybacks. Right now, Intuit is branching out into the small-business market and credit card processing space while still enjoying the benefits of high switching costs. With Intuit's base of users so wide, we find it highly unlikely for a challenger to step in and usurp Intuit's niche. Intuit generates a ton of cash, holds little debt, and still remains run by visionary founder Steve Cook.

Valuation Analysts expect EPS to jump 16% in 2006 and 13% in 2007. At 23 x trailing 12 month earnings and 16 x forward earnings, INTU looks fairly priced to us. We'd await a pullback and one or two quarterly updates regarding Intuit's success (or lack thereof) in the crowded payroll-processing segment before picking up shares.

Risks Intuit's best days are probably behind them, but the name should grab your attention on a pullback. Intuit is a classic growth story whose success is driven by an impressive competitive advantage that stymies imitators while piling up value for long-term shareholders. That said, we're not terribly excited about INTU's foray into the payroll processing segment, which is highly competitive and spotted with formidable contenders, like Paychex (PAYX). Paychex enjoys 38% operating margins and a clean balance sheet. Rival H&R Block (HRB), albeit more leveraged than INTU, could rack up share in the small business segment faster than most people think. We'd follow both rivals like a hawk.

The Bottom Line Intuit holds at least 70% market share in all 3 of its core markets. By pursuing new growth opportunities while defending its key segments, Intuit should continue to grow sales at a high single digit pace and reward investors with stock repurchases and dividend hikes. It is highly likely that Intuit will also use excess cash to make some smaller acquisitions in the near future (several people on the Street have already labeled Checkfree [CKFR], which does online billing processing, "acquisition meat.") In a word, if you can find us a company that'll replace Intuit in the next 5 years, please let us know. Until then, this company has all our respect.

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