Intuit a Hold on Valuation

Intuit, Inc. (INTU - Snapshot Report) is expected to report its fiscal Q4 and FY2008 results on August 21. Earlier, the company reported revenues of $1.3 billion in Q3:FY08, up 15% from a year ago, and surpassed our estimate of $1.28 billion.

The management is pursuing a number of strategies to capitalize on the growth potential of the TurboTax product line. First, Intuit is focusing on retaining customers. Moreover, the company is seeking new ways of increasing sales. The company is taking strategic steps to improve its business model. Even though Intuit’s Small Business segment has been growing, we are concerned about the future growth prospects of this segment, primarily due to increased competition from larger players like Microsoft (MSFT - Analyst Report).

Recently, the management announced a restructuring plan whereby the company will eliminate 7% of the workforce. They reiterated its guidance for revenues to come between $3.05 billion and $3.06 billion in FY08. However, GAAP EPS should come around $1.38-$1.40, down from the previous forecast of EPS around $1.42 $1.44. On a non-GAAP basis, Q4 EPS is now expected between ($0.07) and ($0.09).

Given Intuit’s proven track record of margin expansion since FY2000, we think of it having reached a plateau. Operating margin kept rising from 13% in FY2000 to 28% in FY2006, and has remained at that level (on a yearly basis). We expect similar operating margin performance for FY2008, although Q3 non-GAAP operating margin came in at a robust 55% (35% year-to-date) as more customers migrate to the company’s higher-margin online filing.

Based on valuation, we are maintaining our Hold rating on the stock. The stock currently trades at 17.0x our FY2008 EPS estimate. Our target price of $30 is derived by applying a P/E multiple of 18.6x to our fiscal 2008 EPS estimate. The target multiple is lower than the median P/E multiple of selected peers based on forward earnings.

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