Tax season, a bleak time of year for almost everyone, is a time to shine for Intuit ( INTU), seller of TurboTax, a perennial leader in the market for tax preparation software, and QuickBooks, a favorite of small businesses. But the Mountain View, Calif.-based software maker has more going for it than its best-known products, says analyst Craig Peckham of Jeffries & Co., which Monday forecast earnings growth for Intuit of 52% in 2003. Growing revenue, effective management and a move to higher-margin products make the company an interesting pick in 2003, Peckham said in an interview. "Top-line revenue growth is compelling. It's reasonable to expect 15% to 20% internal growth, a figure that compares very favorably to other large-cap technology companies. Overall revenue growth in the 20s is likely given the benefit of acquisitions," he said. Peckham forecasts pro forma earnings in fiscal 2003 of $1.38 a share (3 cents higher than the consensus of analysts polled by Thompson Financial/First Call), implying a valuation of 33.5 times pro forma earnings at its current price, and $1.80 in 2004. Intuit earned $1.14 a share in 2002, and 86 cents in 2001. Peckham's target price for Intuit is $58 a share. Shares of the company closed at $46.55 Monday, down 56 cents, or 1.19%. The stock hit a 52-week high of $55.04 on Nov. 4 and has risen about 13% in value in 2002. Revenue has grown strongly, from slightly more than $1 billion in fiscal 2000 to $1.35 billion in the year ended July 2002. Consensus estimates call for revenue of $1.7 billion in 2003 and $2.05 billion in 2004. Intuit's core business, tax preparation software and small business accounting applications, is relatively inelastic -- consumers and businesses need to manage finances in bad times as well as good. "That helps to protect growth, but an even bigger story is margin expansion," Peckham said. Operating margins have grown from 16.4% in 2001 to 20.8% in 2002, and Peckham expects them to reach 24% in 2003 and 26% in 2004.
Behind the growth in margins is pricing flexibility and "a detectable level of operational rigor" introduced by CEO Steve Bennett, says Peckham. One example: distributing TurboTax via the Web in addition to retail stores, a move that cuts distribution costs. And on Dec. 23, the company announced its intention to sell its underperforming Japanese subsidiary, Intuit KK, to Advantage Partners, Inc., a private equity investment firm, for $78 million. Intuit expects to book a net gain of approximately $45 million on the transaction. The sale drew favorable comment from Summit Analytic Partners, which wrote: "INTU has been retrenching and focusing on its high growth potential and higher margin product and service areas. Japan has been an extremely difficult place to do business, especially in 2002, and we think this is a good time to sell this business unit, as Japan has not really shown any sign of improvement over the last year." One of the higher-margin products mentioned by Summit is Intuit's Enterprise Solutions, an accounting package launched last spring aimed at small businesses that have outgrown QuickBooks. Landing larger customers is essential; although margins on Intuit's core products are strong, revenue is dropping as the lower end of the market becomes saturated. That move is not without risk, however, since it moves Intuit into a space occupied by Microsoft's ( MSFT) Great Plains subsidiary. Neither Jeffries nor Summit Analytic Partners has an investment banking relationship with Intuit.