Intuit Inc. (INTU, Financial) is known for its accounting and tax software QuickBooks and TurboTax. On the surface, the company appears to have a consumer monopoly with its well-integrated, strongly branded products. Digging deeper, here are seven reasons to love Intuit:
1. Returns
The company has a 10-year median return on equity (ROE) and return on invested capital (ROIC) of 25.34% and 20.35% respectively.
Table 1: Intuit 10-year ROE and ROIC
| ROE (%) | ROIC (%) | |
| 2008 | 23.21 | 15.74 |
| 2009 | 19.32 | 14.13 |
| 2010 | 21.35 | 16.5 |
| 2011 | 23.32 | 16.81 |
| 2012 | 29.55 | 23.89 |
| 2013 | 27.35 | 24.1 |
| 2014 | 27.45 | 24.28 |
| 2015 | 13.49 | 11.75 |
| 2016 | 56.06 | 36.35 |
| 2017 | 77.22 | 49.33 |
| Median | 25.34 | 20.35 |
Source: GuruFocus
2. Margins
Intuit has delivered healthy margins over the years with respective operating and net margins of 26.9% and 18.76% in 2017. The company delivered a 10-year median of 26.7% for operating margin and 17.69% for net margin, compared to the software industry's averages of 19.51% and 12.84%.
Table 2: Intuit 10-year operating and net margin
| OM (%) | NM (%) | |
| 2008 | 21.5 | 15.5 |
| 2009 | 22 | 14.05 |
| 2010 | 25 | 16.61 |
| 2011 | 27.5 | 16.46 |
| 2012 | 30.7 | 19.08 |
| 2013 | 30.6 | 20.57 |
| 2014 | 30.6 | 20.13 |
| 2015 | 17.6 | 8.71 |
| 2016 | 26.5 | 20.86 |
| 2017 | 26.9 | 18.76 |
| Median | 26.7 | 17.69 |
Source: GuruFocus
3. Earnings
A look at Intuit’s earnings per share shows earnings have been consistent and upwardly marching: five-year and 10-year growth rates stand at 7.43% and 11.61% respectively. The consistency found in the company's earnings lead to predictability and confidence in discounted cash flow projections. The company has also delivered decent revenue growth of 6.83% over the past 10 years, although it has slowed to 4.52% in the recent five-year period.
Table 3: Intuit 10-year EPS
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | |
| EPS | $1.41 | $ 1.35 | $ 1.77 | $ 2.00 | $ 2.60 | $ 2.83 | $ 3.12 | $ 1.28 | $ 3.69 | $ 3.72 |
Source: GuruFocus
4. Capital spending
If a company must heavily reinvest in capital assets such as machinery and equipment, it typcially struggles to increase shareholder value at a high rate. Thus, we look at capital spending to pre-tax income to gauge how much a company is spending on capital expenses relative to income. For Intuit, we find 16.8% of its 2017 pre-tax income was spent on capital expenditures. Over the past decade, the median has been 20.6%. Certainly, this is not low – Brown-Forman Corp. (BF.B, Financial), for example, has a 10-year median of 9.6% -- but also, it is not high -- Amazon.com Inc. (AMZN, Financial), for example, has a 10-year median of 173%.
Table 4: Intuit 10-year capital spending/IBT
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | |
| Cap Spending in Millions | $306 | $182 | $143 | $228 | $196 | $209 | $201 | $261 | $522 | $230 |
| Income Before Taxes | $698 | $653 | $815 | $966 | $1,151 | $1,210 | $1,314 | $712 | $1,203 | $1,367 |
| Cap Spending/IBT | 43.8% | 27.9% | 17.5% | 23.6% | 17.0% | 17.3% | 15.3% | 36.7% | 43.4% | 16.8% |
Source: GuruFocus
5. Financial health
Intuit can cover its interest payments 16.81 times using earnings before interest, taxes and depreciation. Also, the company can retire all of its long-term-debt - $438 million - in half a year using 2017’s net income.
6. Efficiency
Intuit has a trailing 12-month asset turnover ratio of 1.19 times compared to the software industry average of 0.48 times. This asset turnover is a measure of how effectively a company can generate sales from its base of assets. Formula-wise, it is net sales divided by average total assets. Ultimately, Intuit is able to generate $1.19 in sales for every dollar invested in assets it holds versus the industry, which can only generate a measly 48 cents.
7. Moat
Intuit's moat rests on a bed of customer “stickiness” due to high switching costs. The company’s Quickbooks software is embedded in the infrastructure of approximately 29 million small businesses – it holds an 80% market share - and switching costs would be expensive and time-intensive. Additionally, Intuit offers ancillary products such as Payroll Services and TurboTax, which integrate more easily with Quickbooks than third-party offerings. Furthermore, a network effect is in place as accountants are more likely to use Quickbooks to match their customers. The moat of Intuit is strong and wide.
Valuation: Not so much
Currently, Intuit is not priced for value as its price-earnings (P/E) ratio stands at 37.83 versus a historic 10-year median of 27.2 and an earnings yield of only 2.64%. The Peter Lynch earnings line – 15 times earnings – prices the company around $65 a share versus its current price of around $145. However, a discounted cash flow analysis using owner’s earnings of $695 million, an average growth rate of 13.38%, a second stage growth rate of 5%, shares outstanding of 265 million and a discount rate of 7.51% shows a value of $179. Still, this is not a significant margin of safety and, coupled with the relative price indicators, leads us to conclude huge value is not present.
Intuit certainly is a good company given its returns, margins, earnings, capital spending, financial health, efficiency and moat. Given its valuation though, investors should be patient, update thier watch list and wait.
Disclosure: The author does not own any of the securities mentioned.
