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Should Intuit Investors 'Ring The Register' Again?

Posted: Aug 25, 2008 11:05 AM by Eugene Bukoveczky

Tickers in this Article: OTC:SGGEF., HRB, MSFT, INTU

During one of his "Lightning Round" sessions in June, CNBC stock guru Jim Cramer advised his viewers to "ring the register" on shares of software maker Intuit (Nasdaq:INTU) arguing that the stock was just "too high" at the time. That bit of advice appeared to be well timed, as the stock subsequently dipped through the balance of June and on through July. (For more on Cramer's advice, and how it can move the markets, read Mad Money ... Mad Market?)

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However, since early August, the stock has rallied back smartly, and now trades well above the mid-June levels that prompted Cramer's bearish call. Has anything fundamentally changed about Intuit in the interim to warrant a re-assessment of the value currently be assigned to the company, or should investors take advantage of the recent rally to "ring the register" yet again?

Regular Results, Bullish Guidance
Judging by the company's recently released results for the year-ended October 31, there's not alot to get particularly excited about. Revenue grew at just under 15%, roughly on track with the growth rate of the previous two years. Non-GAAP earnings per share of $1.60 was in-line with analyst's expectations.

Guidance for 2009, however, was a decidedly more upbeat, with sales growth projected at 9-12%, and EPS projected to fall in the $1.86 to $1.90 range. There had been some concerns that the company might have some difficulty in achieving better than 10% revenue growth next year, but these re-assurances by management appeared to put those fears to rest. Following the announcement, the shares tacked on almost 4%. (Explore the controversies surrounding companies commenting on their forward looking expectations in Can Earnings Guidance Accurately Predict The Future?)

Intuit Still In Command of Core Markets
While such up beat assessments by management must be taken with a grain of salt, there are a number of factors at play to support such an optimistic outlook.

For starters, there appears to be no evidence that the company is loosing its vice-like grip on its two key markets; tax preparation and small business accounting software. Intuit's "TurboTax" software, which holds a comanding 85% market share, continues to achieve steady sales growth despite the enhancements made by rival H&R Block (NYSE:HRB) to its on-line "TaxCut" software offering. "TurboTax" sales were up a healthy 14% during the fiscal year. (No matter who you choose to help you with your taxes this year, be sure to read our related article 10 Steps To Tax Preparation for some simple tips to get you ready for April 15.)

The company's hold on the small business market also continues to look solid, especially in light of Microsoft's (Nasdaq:MSFT) recent decision to discontinue selling its competitive "Money" line of accounting software for small business. That bit of good news comes just as Intuit is placing considerable strategic emphasis on a new online version its popular "Quickbooks" accounting software in an effort to tap into a global small business market. The shift to web-based offerings is also expected to cut costs. Recently, Intuit slashed its workforce by 7%, as a result of its shift to internet-based services. Other small business software rival Sage Group PLC (OTC:SGGEF), which makes the popular "Peachtree" line of software, has so far shown no sign of entering the online market.

The Bottom Line
With such built-in competitive advantages, its no surprise that Intuit made in on the list of companies with strong business "moats" recently compiled in book form by Pat Dorsey, Morningstar's director of equity research. If such competitive advantages can bestow an earnings growth rate of around 17% a year, which is implied by management's recent guidance for 2009, then current forward price earnings ratio of just over 16-times looks more than reasonable on a price/earning to growth (PEG) ratio basis. You might want to resist the urge to "ring the register" on this one - at least for the time being.

To learn more, read Economic Moats Keep Competitors At Bay.

By Eugene Bukoveczky

Eugene Bukoveczky is a freelance writer and investment researcher. He holds a CFA designation and has spent several decades working in the investment business in places like Toronto, New York, London and Dubai. He currently resides in Nova Scotia, where, when not writing, he devotes his time to chopping wood, growing his own vegetables, riding his bike to the store, and thinking about other ways to reduce his carbon footprint.

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