Technology companies have advanced unevenly the past year, with buyout candidates faring much better than companies simply improving on the basis of fundamental earnings growth.
That’s why it’s so impressive to see the success of software maker Intuit (NASDAQ: INTU), up 11% in the past month alone. The producer of such iconic products as QuickBooks, TurboTax, and Quicken, Intuit has positioned itself as the premier low cost provider of finance and accounting tools for small businesses, and it’s always a good strategy to dominate a growing market.
Based in Mountain View, California, you may be surprised to learn that Intuit’s $15.5 billion market cap ranks it fourth in the application software industry, trailing only Microsoft, Oracle, and SAP. And despite trouble among small businesses in the recent cycle, it has fared very well during the past six months, outperforming the NASDAQ Composite by a factor of 3x.
Digging into the numbers from its recent earnings report we find that its balance sheet is incredibly strong, with $1.62 billion in cash. This is among the reasons its debt rating was upgraded recently by Moody’s, which stated that Intuit had ”successfully retained its leadership position in the consumer tax and small business financial software market during the recession.”
You also have to be impressed with the way Intuit has converted a large portion of its revenue into free cash flow. Last year the firm amassed $924 million in cash against total revenue of $3.46 billion. This comes out to a free cash flow margin of 26.7%, which is excellent.
Intuit has helped its own cause by leading small businesses into the cloud. Its web-based processing unit allows individuals to share and store information that can be accessed anywhere via a browser. In fact, “cloud computing” has become a central focus at Intuit, with the company offering online versions of its boxed apps. Its acquisitions of Mint, an online personal budgeting service, and Medfusion, further demonstrate its commitment to develop as a service provider. Membership to Mint more than doubled over the past year, and Medfusion has brought the firm into the administrative side of health care.
Intuit’s online computing model is key to its improved performance. Relying more heavily on sales of its products over the web has helped the firm slash costs. Having to pay for shelf space within a retailer, expensive packaging, and sacrificing profit margins when going through a distributor are problems of the past and have given it a major edge over traditional brick-and-mortar competitors like H&R Block and Jackson Hewitt Tax Services.
Scott Cook, founder and chairman, recently said the company plans to grow next by moving heavily overseas in both developed and emerging markets. Already active in Canada and the United Kingdom, it recently launched a product in India called Money Manager to help individuals and small businesses better manage their bank accounts. Cook has had his hand in operations for over two decades and is one on a small and shrinking list of Silicon Valley entrepreneurs like Larry Ellison of Oracle that has stuck with his startup.
Analysts expect INTU to earn $2.41 per share in 2011, suggesting the stock is currently trading at 20x forward earnings. However, Intuit has historically traded at 25x forward earnings. My model produces a $60 price target over the next year, which is 22% higher than the current $49. Still a good buy on dips.