As tax season approaches, I wanted to take a look at the largest pure tax preparation company in America. Intuit, the owner of TurboTax and Quicken, is a $21 billion market cap technology giant that continues to take share in the tax preparation industry.
20 years ago, tax preparation was dominated by individual accountants as well as accounting firms like H&R Block. Technology has dramatically changed that industry structure, with Intuit leading the way. H&R Block today is less than half the size of Intuit, in market cap terms.
One of the best aspects of the tax preparation business is its consistency. No matter what happens in the broader economy, everyone has to prepare tax returns each year. Moreover, tax preparation is an activity that most people prefer to do the same way each year. So once consumers or small businesses switch to Intuit’s software, they’re highly incentivized to remain on Intuit’s platform in the future.
INTU has profited from the secular trend towards automated tax preparation. Importantly for investors, the industry’s consistency has also led to very smooth growth for Intuit. INTU is among a select group of companies that has grown earnings at least 5% per year in every year over the past decade. That’s an incredible achievement given some of the macro ups and downs, and a testament to the aforementioned consistency of the business.
2013 was not actually a banner year for Intuit’s business, as sales only grew 1% and earnings only grew 5%. However, the stock had a decent year with the broader market rising almost 30% in 2013. Today, INTU made a new intraday all-time high, after yesterday evening’s earnings release. The monthly chart shows that much of the stock’s appreciation has come in the past 5 years:[caption id="attachment_36637" align="alignnone" width="600"] INTU monthly chart, Courtesy of Bloomberg[/caption]
Intuit’s business seasonality (most of its earnings come from tax season) mean that the most important quarterly report will be its fiscal Q3 earnings release in May. On yesterday’s earnings call, Intuit guided to around $3.50 per share, in line with analyst estimates. Market participants were encouraged about the growth of TurboTax, as e-files received by the IRS were up 6.6 percent as of Feb. 14th, vs. up 10% for TurboTax e-files compared to last year.
Intuit management has done a terrific job diversifying the company’s software segments over the past decade. Here is the segment breakdown from the most recent 10-K:
During fiscal 2013 we offered our products and services in the six business segments described in “Business Overview” above. The following table shows the classes of similar products or services, consistent with our reportable segments, that accounted for 10% or more of total net revenue within the last three fiscal years.
Fiscal2013 Fiscal2012 Fiscal2011 Financial Management Solutions 20 % 18 % 18 % Employee Management Solutions 14 % 13 % 13 % Payment Solutions 11 % 11 % 10 % Consumer Tax 36 % 38 % 38 % Accounting Professionals 11 % 11 % 12 %Our products and services are sold mainly in the United States and are described below. International total net revenue was less than 5% of consolidated total net revenue for fiscal 2013, fiscal 2012, and fiscal 2011.
The industry in which we operate is dynamic and highly competitive, and we expect it to remain so in the future. The markets for software and related services, especially highly-available connected services, are characterized by rapid technological change, shifting customer needs, and frequent new product introductions and enhancements. Competition and expertise in many of the markets we serve, particularly small business services and consumer tax, have grown over the past few years and we expect this trend to continue. There are also large, cloud-based service companies who innovate quickly and serve small businesses and consumers. While today our competition with such companies may be limited, as we and those companies grow, our competition with them may increase.In recent years the widespread availability of the Internet, the emergence of mobile devices, and the explosion of social media have accelerated the pace of change and revolutionized the way that people throughout the world manage important financial tasks. The result is a global market that is shifting from traditional services that are paper-based, human-produced, and brick-and-mortar bound, to one where people understand, demand, and embrace the benefits of connected services. This trend toward connected services is the primary driver of the strategies in all of our businesses.
On the 2 prior instances when INTU’s trailing 12 month P/E got over 30 in the past 10 years (late 2006 / early 2007, and late 2010 / early 2011), INTU stock made little progress over the next 6-12 months (and actually market a multi-year top for the stock in late 2006).
INTU is expected to have a much stronger 2014 (23% earnings growth priced in vs. 2013). Intuit management did essentially re-iterate that $3.73 earnings expectation for calendar year 2014 on last night’s call, since the bulk of earnings for the year will come in the next quarter. However, with the valuation stretched, we’d rather keep INTU on our watch list if the stock pulls back into the mid-60’s rather than consider a long entry here. If it doesn’t pullback, so be it. There are many other stocks in the market.
Regardless, Intuit is an admirable company, with very consistent profit growth. This could be a good addition to an investment portfolio at the right price.