Invest in This Stock for Turbo Growth

Mihir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In late April, shares of Intuit (NASDAQ: INTU) plummeted when it lowered its guidance owing to a slowdown in its consumer tax business. It revised its third quarter EPS outlook to $2.92 to $2.94 per share because the performance of the consumer tax business disappointed management. Almost a month later, it announced its Q3 results, beating its guidance on revenue. The shares surged around 4% after the results as the market accepted it warmly.

Good numbers in the quarter

For the third quarter, the company reported EPS of $2.97 excluding options and one-time charges, beating its guidance as well as Street estimates. The revenue surged 13% year over year to $2.18 billion because of higher sales in the tax season in March-April. Its flagship product, TurboTax, which offers easy tax filing solution for individuals and businesses, did not experience growth as management had anticipated.

As per the earnings call, TurboTax paid units increased 4% in the quarter owing to reasons like number of people who file tax returns with the IRS, number of people who use digital path while filing taxes etc. For instance, a fall of nearly 1% in IRS returns cost TurboTax a growth of 2 percentage points.

The decision to re-organize

Intuit announced the decision to split its business into six separate units in order to fuel high growth in core areas, just a day before the earnings. In alignment with its objective to provide small businesses with world-class financial management solutions, it has created two units that shall solely focus on small businesses. This implies that the company is now moving to a specialization structure by dedicating sufficient resources to different segments. I am quite optimistic on this re-organization because it will facilitate easier business management as each unit would be run as an individual revenue and profit center.

Why I love Intuit?

Intuit is fundamentally a strong company for two reasons. The first is its revolutionary product in the market for taxpayers, TurboTax. This product is Intuit’s magic lamp that will unlock huge value for the company going forward. The company is investing constantly to make it a more simple and personalized product so that it can be useful to more taxpayers and bring in better revenue.

Second, there is huge potential in its small businesses segment, which saw a jump of 17% in revenue for the quarter. Intuit has a basket of quick and easy solutions for small businesses that facilitate better financial and overall management. As the economy is developing with visible signs of a healthy recovery, small businesses will surge in number because of easier credit availability, greater demand, and high consumer spending.

Intuit is still having a commanding position

Intuit’s TurboTax software had done damage to H&R Block's (NYSE: HRB) business, as its clients have moved to Intuit for easier tax filing. As this article states, investors were actually looking forward to some big numbers from H&R but its fourth-quarter results missed Street estimates. The company reported earnings of $664.3 million, or $2.42 a share, whereas analysts were expecting earnings of $2.92 per share. The company has not released specific guidance for FY 2014, but a look at the opportunities in tax filing indicates better times forward. It just needs to be more agile in combating competition or else it will be difficult for it to capitalize on the opportunities.

Recently, Automatic Data Processing (NASDAQ: ADP), a leading provider of human capital management and other business solutions, undertook a massive marketing campaign for hiring new and fresh talent. The best part about ADP is that it has created reasonable shareholder value by giving out generous dividends. Most recently, it announced a dividend of $0.44 a share and based on a share price of $68, it translates into a dividend yield of 2.55%. The results for the third quarter came in reasonably strong with an increase of 9% in EPS to $0.99. Falling unemployment rate is suggesting a recovery in the U.S. jobs market, which would prove to be a huge opportunity for ADP going forward.

Favorable financials

Intuit has a very favorable dividend history marked with sizable increases with the most recent being an increase of 13% in the fourth quarter dividend of $0.17 a share. It has also launched a massive share repurchase program to the tune of almost $1.5 billion in order to return cash to the shareholders.

In terms of capital structure, Intuit has a done a commendable job in managing its debt levels. It has reduced its debt equity ratio from around 0.43 to 0.17 in a span of just one year. Intuit has smartly ploughed back earnings for investments in strategic areas rather than taking on more debt and exposing the company to financial risks. Its D/E ratio is quite low as compared to the industry. For instance, H&R’s current D/E ratio is more than 2, implying it to be a highly risky company.

On top of low level of debt, Intuit’s sizable cash flow proves to be an icing on the cake. In the third quarter, cash flow from operating activities increased 13% y-o-y as a result of strong operations and returns from strategic investments.

Final words

To sum it all up, Intuit is one of the rare companies I have seen, that is both fundamentally and technically strong. First, it has products like TurboTax and QuickBooks in its portfolio, which enjoy huge popularity in the market. Then, it has a massive market segment in small businesses that is starting to show promising potential and as for numbers; it is already clear why Intuit has an edge over its peers. All said and done, Intuit is a sure buy.

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Mihir Mehta has no position in any stocks mentioned. The Motley Fool recommends Automatic Data Processing and Intuit. The Motley Fool owns shares of Intuit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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