For Intuit, It's All About The Transition To Recurring Revenue

With Intuit Inc INTU set to release Q2 earnings on Thursday, Deutsche Bank analyst Nandan Amladi says that traders should not be waiting earnings to buy the stock. In a new report, Deutsche Bank upgrades Intuit from Hold to Buy and spells out the value opportunity that the stock presents.

Earnings Preview

Deutsche Bank believes that the market will focus on the company’s guidance when it reports earnings this week. “We estimate INTU can overachieve the 2m subs target in Fiscal 2017 by over 10% with up to $0.25 in EPS upside at the current growth momentum,” Amladi explains.

Intuit has reported QuickBooks Online (QBO) numbers above its guidance the past three quarters, and Deutsche Bank sees no reason why that trend won’t continue in Q2.

Multiple Expansion

Amladi notes that software companies with strong competitive positions that have consistently delivered strong results during a transition to recurring revenue have been rewarded in the market with multiple expansion.

Recent examples of this phenomenon include Adobe Systems Inc ADBE, Aspen Technology Inc AZPN and Amazon.com Inc AMZN.

According to Amladi, Intuit’s below-industry-average EV/Sales multiple will likely expand significantly if the company demonstrates that it can continue to execute.

Outlook

In addition to the potential for multiple expansion, Deutsche Bank likes Intuit’s $1 dividend and ongoing buyback program. Along with the upgrade, the firm raised its price target for the stock from $105 to $120. The new target is based on an estimated 2016 free cash flow of $5.00/sh and an EV/uFCF/G multiple of 1.5x.