Morgan Stanley Downgrades Intuit, See Margins 'Bumping Up Against A Ceiling'

While the FY17 guidance provided by Intuit Inc. INTU appears achievable, margin expansion beyond FY18 could prove to be challenging, Morgan Stanley’s Keith Weiss said in a report. He downgraded the rating on the company from Equal-weight to Underweight, while maintaining the price target at $105.

Analyst Weiss mentioned that the Base Case for Intuit suggests operating margins of 34 percent in FY17, which means that management's margin guidance of 33-34 percent appears achievable. QuickBooks Desktop’s [QBDT] shift to three-year revenue recognition “provides a key source of margin expansion” in FY17 and FY18.

Margin Could Hit A Ceiling

Weiss added, however, that Intuit may find it difficult to achieve margin expansion beyond FY18, “as a growing mix of Small Business revenue versus the higher margin Tax business offsets the tailwind of steadily improving Small Business segment margins.”

The Base Case analysis suggests that Intuit’s operating margins could find a ceiling at ~35 percent beyond FY18 and through FY21, the analyst stated. This translates to mid-teens earnings growth over the next several years.

Although Intuit’s stock deserves a premium due to the durable subscriber base, the current multiples reflect this and have limited upside from current levels, Weiss commented.

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