BABSON COLLEGE FUND. Investment Action & Thesis. Key Investment Highlights (NASDAQ:INTU)

Transcription

1 Rating: BUY Price Target: $69.33 Close 09/28/12 Price $ Wk. $ Shares Out (m) Mkt. Cap (m) $17,378 Source: Bloomberg, Thompson Intuit Inc. (INTU) Industry: Technology Basic Information Beta.93 Cash & CE (m) $393M Total Debt/Capital 2.79% Trailing P/E (ltm) 23.9x Forward P/E (ntm) 18.0x ROE: 29.55% Dividend Yield 1.16% Dividend $0.68 Source: Bloomberg, CapitalQ Company Overview Intuit Inc. provides business and financial management solutions for small businesses, consumers, accounting professionals, and financial institutions primarily in the United States, Canada, the United Kingdom, India, and Singapore. Source: Thompson Analysts BCF Technology Sector Lakshmi Kancharla Gregory Bissett Zachary Willner Kiriti Mukherjee invest.babson.edu Source: BCF, Analyst Estimates Investment Action & Thesis We are initiating coverage on Intuit Inc. (INTU) with a BUY rating and a 18% upside target price of $ We are confident that Intuit is well positioned to benefit from its continued shift to the cloud and its ability to take share away from traditional tax preparers. Further, we believe that the strength of the overall financial management ecosystem provided by the Company will bolster upselling and cross-selling in the U.S. and abroad as they extend their offering to over 100 countries around the world. The Company s increased efforts in offering CRM software as well as their consistently high level of innovation will also contribute to future success. Intuit s asset allocation for its next fiscal year includes $400 million worth of stock repurchases and dividend increase of 13% - both of which should have favorable effects on the stock s performance. Key Investment Highlights Stealing Share from Traditional Tax Preparers: In order for Intuit to realize the growth that we have projected, it must take significant share away from accountants and professional tax preparers. We believe that the market is being overly pessimistic about the Company s ability to successfully overcome this obstacle, keeping the stock depressed. Over the past 5 years, usage of tax preparation software has increased by 7% while accountant services and tax preparation stores have fared much worse - experiencing an increase of 1% and a decrease of 1% respectively. We believe this trend will continue to accelerate as tax filers become more comfortable with and accustomed to performing important tasks digitally. This trend will be further facilitated by new tax filers being digitally savvy and, thus, much more likely to use tax preparation software such as Intuit s TurboTax which currently controls the most market share in the space. Intuit s tax preparation software will also gain market share as a result of its relative inexpensiveness. According to Intuit market research, the average price of tax preparation software is $46 while accountant and tax store preparation on average cost $239 and $203. We believe that the market does not weigh this advantage enough because of the larger sum of money the more traditional channels are able to save customers. Although this is generally true, the difference in money saved is not significant enough to warrant such a price difference making TurboTax the better deal. Ecosystem Generated Up-selling and Cross-selling Intuit s significant market share in various financial management software markets serves as a great foundation for potential up-selling and cross-selling opportunities. The most likely starting point for up-selling and cross-selling is QuickBook; out of the 29 million small businesses 1 of 6

2 in the United States, 25% of them use the small business accounting software. The Company has made it easy for consumers of one product to integrate it with another in order to increase the efficiency of their financial management. For example, if a landscaping company uses QuickBook (small business accounting program) and GoPayment (mobile payment processor), after mowing a lawn, an employee can process the payment remotely using GoPayment and have it fully accounted for back in the company s office with QuickBook without having to do any separate recording. We believe that such efficiencies will enhance the generation of sales in competitive product segments such as in payment processing and payroll software. Further, we believe that investors underestimate Intuit s ability to significantly expand revenues in these markets; they do not fully appreciate the major competitive advantage that Intiut products have due to their ability to seamlessly grant access to and allow for the utilization of other products and services within the financial management ecosystem formed by the Company s offerings. Shifting Software to the Cloud: Intuit has begun making its products available via the cloud so that customers can manage their or their company s financial information from any computer while incurring lower costs and experiencing quicker deployment. A major element of this campaign is Intuit s introduction of Inuit Partner Platform an application programming interface (API) that allows thrid-party developers to create apps for QuickBook. Salesforce.com and ebay have already agreed to create apps so that QuickBook users can better utilize the respective offerings of these companeis. In addition to increasing revenues strictly from developer subscriptions, this API should help to innovate QuickBook s overall offering, making the software appealling to more people and eventually increasing market share. It is our position that the market holds a more conservitave stance on the growth prospects of this strategy because of the relatively large amount of revenue generated by their desktop software that has traditionally been the form through which they offer their products. We believe that because roughly 14% of the QuickBook revenue is generated by the sale of desktop software, and that those sales have been rapidly decreasing, the market is excessivley sceptical and the result is an overly depressed share price. Move to Front Office : Intuit products have traditionally focused solely on back office products meant to control and organize finances but the Company s recent acquisition of Demandforce a developer of CRM web-based applications extends their offering. Demandforce will help companies retain customers, organize their relationships with them and ultimately save owners time so that they can concentrate more of their energy on running their business. Demand force has only been a part of Intuit since May 2012 which we believe is not long enough for the company and its capabilities to be most effectively integrated with other Intuit products. As the two entities work with each other more, synergies will be realized and revenues will increase. QuickBooks Global Expansion: In FY2012, 10% of new users growth came from outside of the United States, QuickBook presently has 4 million foreign users. This source of sales is expected to substantially grow as the Company actively looks to offer its products outside of the U.S. In recent weeks, Intuit has increased the presence of QuickBook from a handful of countries to nearly 130. With the help of Google Translate, the QuickBook s userfriendly s interface will be available in 40 different languages. We believe that QuickBook s strong market share and brand name will cause it to become the first choice in small business software in foreign countries especially emerging market countries where the number of start-ups is expected to rise more than more mature countries. Strong Innovation: Although it is difficult to quantify, we believe that Intuit s constant and effective innovation will allow them to outperform market expectations. Intuit is currently positioned as the 57 th most innovative company in the world according to FORBES annual list of the 100 most innovative companies. Even more impressive and promising is the fact that roughly $100 million in revenue generated in FY2012 came from products that didn t exist three years ago. Intuit performs hundreds of tests and experiments each year on different products to better and/or expand their offering. For example, the company has created fake websites and has then tracked their viewing patterns to gauge customer acceptance. With Intuit software such as QuickBook and TurboTax already controlling such dominant market share in their respective segments, we believe that the market is relatively doubtful about significant growth. We further believe that investors underestimate the company s high level of innovation that we expect will generate the growth we have projected. 2 of 6

3 Risks Small Business Financial Software Depends on the Global Economy: Although this market (consisting of several types of software) is expected to grow, economic slowdowns decrease general spending and small business revenue generation that leads to heightened rates of bankruptcy. Also, it is possible that significant economic downturns or a recession will greatly decrease small business spending, causing them to have continue using paper and pencil to maintain their books. Difficulty Increasing Consumer Tax Share: TurboTax s share of filed tax returns increases by 1% every year and increased competition in the space could slow down that growth, causing the stock to fall short of our expectations. H&R Block gained 1% market share in the last fiscal year and if that trend continues, it will become more challenging for Intuit to perform at as high a level as predicted. Inability to Penetrate International Markets As Intuit beings to expand internationally, it may experience unexpected difficulty in making its software comply with foreign accounting standards and various, country-standards for maintaining financial records. Strengths, Weaknesses, Opportunities, and Threats (SWOT) Analysis Strengths Largest market share in several product markets Strong ecosystem that results in multiple product purchases Software available in cloud Increasing contribution to the revenues by all product lines High switching costs Higher Margins than Comps Very little debt (2.8% Debt/Total Capital) Opportunities Expansion into over 100 foreign countries Great financial health approx. $744 million in cash and cash equivalents and short-term investments to reinvest in the company. Enhanced mobile offering Use data collected from online software to better products and services Weaknesses Intense competition in certain product segments TurboTax more expensive than H&R Block software 14% of revenue still coming from desktop software Threats Growth expectations too high given already dominant positions in main product segments H&R Block and other tax preparation software steal market share from TurboTax International usage of Intuit software doesn t increase as much as predicted Well-known companies do not follow Salesforce.com and ebay s lead in creating apps for QuickBook Valuation Based on the equal weighting of our CompCo and Discount Cash Flow analysis, both of which we weighted equally, we determined the fair value of Inuits s equity to be $ of 6

4 Trading Multiple Analysis We calculated our Comparable Company Analysis share price by multiplying Intuit s normalized LTM EPS by a weighted average median NTM P/E multiple. Instead of simply taking the median of the group, we used a weighted average multiple of the five companies we believe are most comparable to Intuit. The companies chosen were ACIW, ADVS, HBR, KNXA, and SGE with weightings of 16.7%, 12.5%, 25.0%, and 33.3% respectively. The weighted average EV/Revenue, EV/EBITDA, and NTM P/E multiples created using this method were 2.4x, 14.4x, and 22.9x. Intuit s EV/EBITDA and NTM P/E multiples trade at discounts to the same median multiples produced by this analysis. Company Comp Set Company Name TEV/Total Revenues LTM - Latest TEV/EBITDA LTM - Latest P/Diluted EPS Before Extra LTM - Latest NTM Forw ard P/E (Capital IQ) ACI Worldw ide, Inc. 3.7x 19.0x 58.3x 19.6x (NasdaqGS:ACIW) Informatica Corporation (Nasda 4.3x 19.1x 36.1x 21.3x qgs:infa) Adobe Systems Inc. 3.4x 10.0x 21.5x 13.2x (NasdaqGS:ADBE) Blackbaud Inc. (NasdaqGS:BLKB) 3.4x 21.2x 64.3x 22.2x Comverse Technology Inc. 1.1x 11.4x NM 17.0x (NasdaqGS:CMVT) salesforce.com, inc (NYSE:CRM) 8.2x 185.9x NM 97.2x Advent Softw are, Inc. 3.4x 16.7x 48.2x 24.7x (NasdaqGS:ADVS) Online Resources Corp. 1.2x 7.0x NM 13.9x H&R Block, Inc. 1.6x 6.4x 13.6x 10.1x SAP AG (DB:SAP) 4.4x 12.2x 18.7x 15.3x Global Payments Inc. 12.2x 7.1x 18.4x 12.0x Cerner Corporation 18.7x 17.2x 35.0x 28.5x (NasdaqGS:CERN) Kenexa Corp. (NYSE:KNXA) 0.0x 17.3x 40.6x 35.9x NetSuite Inc. (NYSE:N) 15.7x NM NM 251.7x Sage Group plc (LSE:SGE) 2.8x 9.7x 16.1x 15.0x Automatic Data Processing, Inc. 2.5x 11.5x 20.7x 19.9x Paychex, Inc. 5.4x 12.7x 22.7x 21.5x Median 3.4x 12.2x 22.1x 19.9x Median - ACIW, ADVS, HBR, 2.4x 14.4x 34.6x 22.9x KNXA, SGE Intuit Inc. (NasdaqGS:INTU) 4.2x 12.4x 23.9x 18.0x LTM Financial Metrics Revenue EBITDA EPS Share Price Intuit Inc. (NasdaqGS:INTU) 4, , $59.64 Source: BCF Estimates and CapitalQ 4 of 6

5 DCF Assumptions D&A and Capital Expenditures will increase slightly by each year as the company expands internationally Terminal growth rate of 2% which is the industry standard Inuit Inc. (INTU) Actuals Estimates ($ in millions, except per share items) FY2011 FY2012 FY2013 FY2014 FY2015 Revenues $3,772 $4,151 $4,565 $5,029 $5,541 Revenues Growth Y.o.Y. 11% 10.05% 9.96% 10.17% 10.18% EBIT $1,037 $1,177 $1,368 $1,537 $1,726 EBIT Margin 27.50% 28.36% 29.96% 30.56% 31.16% -Taxes Tax Adjusted EBIT $693 $793 $917 $1,029 $1,156 +Depr. & Amort Change in Work. Cap. (2.0) (70.0) Capital Expenditures Free Cash Flow $822 $970 $981 $1,101 $1,231 Discounted Free Cash Flow 981 1,023 1,062 DCF Model Terminal Value Perpetual Growth g = 2.0% 22,168 Cost of Capital Sources Beta (Fundamental) 0.93 Bloomberg Risk-free Rate 1.79% Wall Street Journal Risk Premium 6.50% Historic Pre-tax Cost of Debt 1.78% Bloomberg Total Debt / (Total Debt + Mkt Cap) 2.81% Cost of Equity 7.85% CAPM Tax Rate 35.00% ValueLine WACC 7.66% DCF Model Perpetual Growth Equity Value Per Share Sensativity to Growth and WACC Enterprise Value $22, % 1.50% 2.0% 2.50% 3.00% Cash and Equivalents $ % $76.53 $83.21 $91.33 $ $ Total Debt $ % $70.67 $76.24 $82.89 $90.97 $ Fair Equity Value $22, % $65.70 $70.41 $75.96 $82.58 $90.62 Shares Outstanding % $61.43 $65.46 $70.15 $75.67 $82.26 Fair Stock Value $ % $57.72 $61.21 $65.23 $69.90 $75.39 Source: BCF Estimates, CapitalIQ, Bloomberg, ValueLine 5 of 6

6 Appendix Income Statement 6 of 6

7 Financial Performance INTU 12-Month Performance INTU Vs. IYW fa INTU Operating Income Vs. GDP Growth Best Comps Margin Comparison CAGR: 12.65% 7 of 6

8 Value Line 8 of 6

9 Important Disclosures Babson College Fund The Babson College Fund (BCF) is an academic program in which selected students manage a portion of the Babson College endowment. The program seeks to provide a rich educational experience through the development of investment research skills and the acquisition of equity analysis and portfolio management experience. Please visit for more information. Analyst Contact Information Lakshmi Kancharla lkancharla1@babson.edu Gregory Bissett gbissett1@babson.edu Zachary Willner zwillner1@babson.edu Kiriti Mukherjee kmukherjee1@babson.edu Definition of Ratings BUY: Expected to outperform the IYW producing above average returns. HOLD: Expected to perform in line with the IYW producing average returns. SELL: Expected to underperform the IYW producing below average returns. References Intuit Quarterly Webcast JP Morgan Research Associate, Saket Kalia Bloomberg IBISWorld Valueline Capital IQ Intuit Inc. 10K/10Q and transcripts Published Analyst reports 9 of 6