Brad Smith's exit as CEO,along with the Chief Technology Officer, from Intuit (INTU) should not scare investors.
The shares rose 1.9% on Friday, a day after the company announced Smith will step down at the end of the year. Sasan Goodazri, who is now executive vice president for Intuit's Small Business and Self-Employed Group, will take on the CEO role. Smith won't leave Intuit altogether: he will serve on Intuit's board as Executive Chairman.
Executives come and go, and after eleven years it's not a huge shocker. The financial software company won't lose Smith completely as he's staying on the board. The news coincided with the company's fiscal fourth quarter results that outperformed expectations. If anything, investors should worry more about the stock being a little overpriced, rather than the departure of executives. Stifel Nicolaus announced an increase in their price target this morning to $250 a share. I think this is a stretch relative to actual earnings.
The owner of programs like TurboTax and Quickbooks, Intuit sits in a very nice spot vis-à-vis business cycles. Regardless of whether customers make money or lose money, everyone has to do taxes. There is somewhat of an assured demand for their services. Every small business has to keep their books, and Quickbooks is an invaluable tool in that regard. I think the nature of the services they provide mean the company will continue to do well because the industry is indispensible.
The problem that I do see is overvaluation. Intuit is too expensive. The financial growth has been great, but the stock is already showing much of the gains. Because of that, I think we're looking at a "hold" situation regardless of the CEO exit.
Intuit hasn't always produced consistent annual increases in net income under Smith's leadership. Revenue growth is consistent, but not as big as many other stocks out there. This isn't necessarily a criticism, as slow and steady can absolutely win the race, but it doesn't make me overly enthusiastic for the stock's valuation. The fourth quarter results brought Intuit's full year revenues to just under $6 billion. That's a 15% increase year over year. A larger portion of their revenue came from online activities, as the company is pushing into a Amazon Web Services capacity; having solid its large data center. This push led to a 43% increase in online Quickbooks subscribers. It should be noted that the quarter actually included an operating loss of $81 million; and tax provisions are what created profitable net income of $49 million.
It's not a huge deal though, as the year as a whole had net income of $1.21 billion. That's a 24.7% improvement year over year. The diluted earnings per share obtained from that income increased a comparable 24.8% to $4.72 a share.
These are great numbers, and shareholders should be happy. But when you look at them in regards to what the share price has done, I think a $250 price target is a reach. We're entering into a market that is beginning to favor results or promises, and value plays are more and more the name of the game. For the year, the company's non GAAP earnings of $5.61 beat the estimate range high of $5.57. But even at $5.61, Intuit trades at over 37x full year earnings. To me that's expensive for a stock that doesn't have a consistent five year trend of income growth.
Smith's replacement, Sasan Goodarzi, has been with the company for some time as an executive vice president of their small business division. I don't expect a huge shift from their current game plan of pushing more of their business online.
In a cloud-based world, it makes sense. But it doesn't make up for the valuation here.
In the coming months, I'm predicting limited upside in the stock price. This isn't because the company is performing poorly. The market has simply put way too much into this one already.
Even when Intuit beats estimates, it's usually pretty darn close. To that end, fiscal 2019 estimates of $6.47 will likely be in the ballpark. At those earnings, the stock would be trading at around 38x the full year's earnings. I'm no longer accepting those types of prices on stocks like this. At this stage of the bull market, I want value. If it were a startup, sure I'd maybe chance it. Investors can do what they want, but I'm out unless this thing comes back to maybe $180.
