Is Intuit Inc. (INTU, Financial) prepared for the potential recession that may lie just ahead? Many economic and investment observers expect that the current recession in the real economy will translate to more concrete financial metrics soon, and if it does, then it makes sense to have some financially solid, well-established companies in our portfolios that can weather the storm.
In this environment, I've turned to the legendary investor Peter Lynch for inspiration. Lynch had a ladder of stock categories, and one important category on that list was stalwarts. The stalwarts are established stocks that have grown their earnings by 10% to 20% per year.
To find such stocks, GuruFocus set up the stalwarts screener, which identifies stocks that have four key characteristics of stalwarts:
- They must have a business predictability ranking of at least 2 out of 5 stars.
- Their ROC (return on capital) or ROIC (return on invested capital) must average at least 14% per year over the past decade.
- Revenue growth over the past 10 years has averaged between 8% and 20%.
- Earnings per share without non-recurring items has grown between 10% and 20% per year for the past decade.
In his book, “One Up on Wall Street: How to Use What You Already Know to Make Money in the Market," Lynch had the following to say about the importance of stalwarts:
“I always keep some stalwarts in my portfolio because they offer pretty good protection during recessions and hard times... You know they won’t go bankrupt, and soon enough they will be reassessed and their value will be restored...
No matter how bad things get, people still eat cornflakes. They may take fewer trips, postpone the purchase of new cars... But they eat just as many cornflakes.” [Kellogg Company (K, Financial) was one of Lynch’s stalwarts].
Making the case for Intuit
The first criterion on the stalwart screener list is a business predictability ranking greater than 2 out of 5. Intuit meets that test with a business predictability ranking of 3.5 out of 5 stars, thanks to the relatively consistent growth of its revenue and Ebitda over time:
The second criterion is that ROC or ROIC must average at least 14% per year over the past decade. Consistency is hardly the word I would use to describe Intuit’s ROIC, so it must meet the requirement on the ROC front:
The third criterion is revenue growth averaging between 8% and 19% per year. Notice that this screener has a ceiling for revenue growth; this is because faster growth is not consistent with the definition of a stalwart. For these stocks, GuruFocus offers the fast growers screener, which is where you can find stocks growing revenue between 20% and 25% per year.
As shown above, Intuit’s revenue has grown in the correct range for a stalwart, averaging 12.13% per year:
The fourth and final criterion is earnings per share without non-recurring items growth averaging between 10% and 19% per year. Again, Intuit makes the range at 15%:
Though the stock may technically meet the criteria, I am personally concerned by the low ROIC.
Fundamentals
Over the past five years, except this year, the stock has delivered robust total annual returns:
- 2022 (to-date): -40.91%
- 2021: 69.34%
- 2020: 45.05%
- 2019: 33.06%
- 2018: 24.76%
Based on its strong financial strength, profitability, growth, GF Value and momentum rankings, Intuit earns a very high GF Score of 97 out of 100:
Turning to the 10-K for 2022 (the company's fiscal year ended on July 31), the below chart from the 10-K shows how the stock has outperformed both a peer index and the S&P 500:
On the GF Score chart, the only area of weakness is the financial strength component, but I don't see that as much of an issue. The below screenshot of the company's GuruFocus financial strength table shows a strong Altman Z-Score of 7.21, meaning bankruptcy is not likely.
According to the balance sheet, Intuit had short-term debt of $499 million and long-term debt of $6.415 billion on a trailing 12-month basis. Against that, it has $2.796 billion in cash and cash equivalents, as well as $485 million in marketable securities, for a total of $3.281 billion. The company should be able to maintain healthy cash balances based on these data points.
As the last line on the financial strength table shows, Intuit's weighted average cost of capital (WACC) is 7.57%, while ROIC is 10.51%. That means the company is creating value for shareholders.
Add to that the growth rate of its free cash flow at 13.24%, and I believe this company's financials will be alright:
Compared to its interest payments, it generates a significant amount of operating income of $2.571 billion on a trailing 12-month basis, which provides a healthy interest coverage ratio of 31.74.
Gurus
Gurus have a lot of confidence in Intuit; 17 of them have holdings in the stock, which is a relatively high number. The two biggest investors are Frank Sands (Trades, Portfolio) of Sands Capital Management with 1,339,551 shares (representing a 0.48% interest in Intuit and 1.95% of Sands’ latest 13F portfolio) and Andreas Halvorsen (Trades, Portfolio) of Viking Global Investments with 1,157,479 shares.
Institutional investors own 85.39% of Intuit, while insiders own 0.51%. The biggest insider stake belongs to Brad Smith, a former CEO and executive chairman of Intuit.
Conclusion
Intuit may be weak on the ROIC criterion, but otherwise, it is a solid stalwart stock. It enjoys a suitable business predictability ranking and meets the criteria for revenue and earnings growth. It is the type of stock prudent investors will seek if they want recession protection and upside potential in my opinion.
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