Intuit [NDQ:INTU] Jan. 2, 2009 $24.20/share
52-week range: $20.18 (Dec. 1, 2008) - $32.00 (Sep. 26, 2008)
Users of TurboTax, Quicken and Quickbooks help Intuit make profits year after year. Intuit’s software products are industry leaders on both the consumer and professional side of their markets. Once you start using their products you’re likely to stay with them for ease of use and year-over-year continuity of data.
This is a well established and renewable market as each year’s tax forms are unique. The annual renewability of sales makes Intuit meet Warren Buffett’s description as ‘razor blade’ company (like BRK’s Gillette).
INTU has shown outstanding and predictable growth in virtually every measurable way. Here are the (split-adjusted) per share numbers for the past nine fiscal years (as reported by Value Line). FYs end July 31 of the same calendar year.
FY …..….. Sales …… C/F ….... EPS …... B/V ….. Avg. P/E
2000 …... 2.68 …… 0.85 ….. 0.32 ….. 5.07 …… 66.9x
2001 …... 3.00 …… 0.54 ….. 0.40 ….. 5.13 …… 53.2x
2002 ….…3.22……. 0.69 ….. 0.54 ….. 5.25 …… 36.8x
2003 ….…4.14 …… 0.92 ….. 0.70 ….. 4.93 …… 32.6x
2004 ….…4.91 …… 1.04 ….. 0.84 ….. 4.79 …… 27.2x
2005 ….…5.80 …… 1.32 ….. 1.00 ….. 4.73 …… 21.6x
2006 ….…6.78 …… 1.55 ….. 1.23 ….. 5.03 …… 21.0x
2007 .……7.89 …… 1.77 ….. 1.43 ….. 6.00 …… 21.4x
2008 .……9.52 …… 2.04 ….. 1.60 ….. 6.43 …… 18.1x
Consensus estimates for FY 2009 (ends July 31st) are now centered on $1.81/share which would be another new all-time high EPS. FY 2010 estimates are now at $2.04/share.
That puts the current year multiple at just 13.4x. That’s lower than these shares have ever traded since the company’s IPO in March 1993. While we are unlikely to see a quick rebound to the 10-year median P/E of 26x I could easily envision a bounce back to at least 16 times the calendar 2009 expected EPS of $1.90 for a conservative 12-month target price of over $30.
Is that reasonable to expect? INTU shares hit peak share prices of $36, $33.10 and $32 in 2006, 2007 and 2008 while fundamentals were not nearly as good as they are today.
Value Line rates Intuit’s financial strength as ‘A’ and notes it ranks in the 80th percentile for ‘stock price stability’ and in the 95th percentile (with 100th being best) for ‘earnings predictability’ compared to all stocks in the 1700 stock VL universe.
Clearly there is room for a much higher share price for a high-quality, consistent grower like Intuit. Even so, here is a buy/write option combination that makes sense if you feel that ‘the market’ may stay depressed in the near term.
…………………………………......................……….. Cash Outlay …....… Cash Inflow
Buy 1000 INTU @ $24.20 ……….............………. $24,200
Sell 10 Jan. 2010 $25 Calls @ $4.20 ………................…………………… $4,200
Sell 10 Jan. 2010 $25 Puts @ $4.70 …………..............…………………. $4,700
Net Cash Outlay ……………………………….................…….. $15,300
On expiration date (Jan. 15, 2010) if INTU is $25 or higher -
plus 3.4% from today’s quote:
Your $25 calls will be exercised and your shares sold for $25,000.
Your $25 puts will expire worthless (a good thing for you as a seller).
You will have no further option obligations.
You will have $25,000 for your original $15,300 outlay.
That’s a gain of $9,700 on shares that only needed to go up by at least 3.4%.
If INTU shares finish below $25 you would be forced to buy and pay for an additional 1000 shares.
Your $25 calls would expire worthless.
Your $25 puts would be exercised.
You would buy another 1000 shares for $25 less the $4.70 put premium.
That’s a net cost of $20.30/share or almost exactly where they traded at the nadir of the recent panic low.
You would now own 2000 shares total.
What’s your risk?
Break even on this whole trade is figured as follows:
On the original shares it’s your purchase price of $24.20 less the $4.20 call premium = $20.00/share.
On the second 1000 shares that were ‘put’ to you it’s the $25 strike price less the $4.70 put premium = $20.30/share.
Your average net cost basis is thus $20.15/share - lower than the lows at any time during 2006 – 2007 – 2008.
If the shares perform as expected and are $25 or better by Jan. 2010 you will make a 63% cash-on-cash return. If the shares stay below $25 your cost basis is below the past three years’ absolute lows and about 10.5x earnings versus their historical median valuation of 18 – 26x.
The 12.5 month holding period means you can defer your gains until 2010 should this work out as expected. You would report the transactions on your 2010 Schedule-D in April of 2011.
You can even use Intuit’s products to figure your profits and report your capital gains.
Disclosure: Author is long INTU shares and short INTU options.
52-week range: $20.18 (Dec. 1, 2008) - $32.00 (Sep. 26, 2008)
Users of TurboTax, Quicken and Quickbooks help Intuit make profits year after year. Intuit’s software products are industry leaders on both the consumer and professional side of their markets. Once you start using their products you’re likely to stay with them for ease of use and year-over-year continuity of data.
This is a well established and renewable market as each year’s tax forms are unique. The annual renewability of sales makes Intuit meet Warren Buffett’s description as ‘razor blade’ company (like BRK’s Gillette).
INTU has shown outstanding and predictable growth in virtually every measurable way. Here are the (split-adjusted) per share numbers for the past nine fiscal years (as reported by Value Line). FYs end July 31 of the same calendar year.
FY …..….. Sales …… C/F ….... EPS …... B/V ….. Avg. P/E
2000 …... 2.68 …… 0.85 ….. 0.32 ….. 5.07 …… 66.9x
2001 …... 3.00 …… 0.54 ….. 0.40 ….. 5.13 …… 53.2x
2002 ….…3.22……. 0.69 ….. 0.54 ….. 5.25 …… 36.8x
2003 ….…4.14 …… 0.92 ….. 0.70 ….. 4.93 …… 32.6x
2004 ….…4.91 …… 1.04 ….. 0.84 ….. 4.79 …… 27.2x
2005 ….…5.80 …… 1.32 ….. 1.00 ….. 4.73 …… 21.6x
2006 ….…6.78 …… 1.55 ….. 1.23 ….. 5.03 …… 21.0x
2007 .……7.89 …… 1.77 ….. 1.43 ….. 6.00 …… 21.4x
2008 .……9.52 …… 2.04 ….. 1.60 ….. 6.43 …… 18.1x
Consensus estimates for FY 2009 (ends July 31st) are now centered on $1.81/share which would be another new all-time high EPS. FY 2010 estimates are now at $2.04/share.
That puts the current year multiple at just 13.4x. That’s lower than these shares have ever traded since the company’s IPO in March 1993. While we are unlikely to see a quick rebound to the 10-year median P/E of 26x I could easily envision a bounce back to at least 16 times the calendar 2009 expected EPS of $1.90 for a conservative 12-month target price of over $30.
Is that reasonable to expect? INTU shares hit peak share prices of $36, $33.10 and $32 in 2006, 2007 and 2008 while fundamentals were not nearly as good as they are today.
Value Line rates Intuit’s financial strength as ‘A’ and notes it ranks in the 80th percentile for ‘stock price stability’ and in the 95th percentile (with 100th being best) for ‘earnings predictability’ compared to all stocks in the 1700 stock VL universe.
Clearly there is room for a much higher share price for a high-quality, consistent grower like Intuit. Even so, here is a buy/write option combination that makes sense if you feel that ‘the market’ may stay depressed in the near term.
…………………………………......................……….. Cash Outlay …....… Cash Inflow
Buy 1000 INTU @ $24.20 ……….............………. $24,200
Sell 10 Jan. 2010 $25 Calls @ $4.20 ………................…………………… $4,200
Sell 10 Jan. 2010 $25 Puts @ $4.70 …………..............…………………. $4,700
Net Cash Outlay ……………………………….................…….. $15,300
On expiration date (Jan. 15, 2010) if INTU is $25 or higher -
plus 3.4% from today’s quote:
Your $25 calls will be exercised and your shares sold for $25,000.
Your $25 puts will expire worthless (a good thing for you as a seller).
You will have no further option obligations.
You will have $25,000 for your original $15,300 outlay.
That’s a gain of $9,700 on shares that only needed to go up by at least 3.4%.
If INTU shares finish below $25 you would be forced to buy and pay for an additional 1000 shares.
Your $25 calls would expire worthless.
Your $25 puts would be exercised.
You would buy another 1000 shares for $25 less the $4.70 put premium.
That’s a net cost of $20.30/share or almost exactly where they traded at the nadir of the recent panic low.
You would now own 2000 shares total.
What’s your risk?
Break even on this whole trade is figured as follows:
On the original shares it’s your purchase price of $24.20 less the $4.20 call premium = $20.00/share.
On the second 1000 shares that were ‘put’ to you it’s the $25 strike price less the $4.70 put premium = $20.30/share.
Your average net cost basis is thus $20.15/share - lower than the lows at any time during 2006 – 2007 – 2008.
If the shares perform as expected and are $25 or better by Jan. 2010 you will make a 63% cash-on-cash return. If the shares stay below $25 your cost basis is below the past three years’ absolute lows and about 10.5x earnings versus their historical median valuation of 18 – 26x.
The 12.5 month holding period means you can defer your gains until 2010 should this work out as expected. You would report the transactions on your 2010 Schedule-D in April of 2011.
You can even use Intuit’s products to figure your profits and report your capital gains.
Disclosure: Author is long INTU shares and short INTU options.
