Is Intuit Stock a Bargain Here? Its Cash Flow Results Imply a 20% Upside in INTU

Intuit Inc. (INTU) reported strong revenue and cash flow results on Thursday, Nov. 21, for its fiscal Q1 ending Oct. 31. The company's trailing 12-month free cash flow margins exceeded 31%, implying that INTU stock could be worth up to 20% more at $779 per share.  This article will show how that works out.

INTU is at $649.34 in morning trading on Monday, Nov. 25, up from Friday's lower close. However, INTU is well off its recent high of $706.25 on Nov. 13.

So, is the stock a bargain? Looking at its free cash flow (FCF) results over the trailing 12 months (TTM) suggests it is.

INTU - last 3 months – Barchart - As of Nov. 25, 2024

INTU's Value Based on Its Dividend Yield

I wrote an article in Barchart on Aug. 27 that INTU stock looked undervalued: “ Intuit Looks Like a Bargain After Hiking Its Dividend By 16%.” The dividend per share (DPS) is now $4.16, giving INTU a 0.64% dividend yield

I argued that its average historical yield was 0.5757%. Therefore, its average value should be $721.35, or +11% higher. Here's why:

    $4.16 DPS / 0.005767 = $721.35 per share

and

     $721.35 / $649.34 -1 = 1.11 -1 = +11%

But, looking at the company's historical FCF suggests that INTU stock could be worth much more.

LTM Free Cash Flow Was Strong

Intuit runs the Turbo Tax, QuickBooks, MailChimp, and Credit Karma brands. It makes most of its cash flow during the quarter ending April 30 (i.e., fiscal Q3). 

Therefore, it makes sense to always measure the company's results on a look-back trailing 12-month (TTM) basis.

For example, in its latest quarterly report, Intuit's cash flow statement shows that its free cash flow (FCF) was $329 million:

   $362m operating cash flow (OCF) - $33m = $329m FCF

That represented 10% of its $3.283 billion in fiscal Q1 revenue for the quarter. However, in the TTM period ending Oct. 31, it generated $5.2 billion in FCF:

   $5,343m OCF - $140m capex = $5,203m FCF = $5.2 billion TTM FCF  (Seeking Alpha data)

That represented 31.36% of its TTM revenue of $16.59 billion for the same 12-month period ending Oct. 31. This was higher than the 28.5% FCF margin last quarter, as I reported in my prior Barchart article.

This is important since any dividend increase in the future will be funded by the company's future FCF and FCF margins.

So, let's project out its next 12 months (NTM) FCF. That can help us value INTU stock going forward.

Forecasting NTM FCF

Intuit provided its own sales forecast in the latest Q1 report:

“Revenue of $18.160 billion to $18.347 billion, growth of approximately 12 to 13 percent.”

Analysts surveyed by Seeking Alpha have an average forecast of $18.27 billion this year and $20.53 billion next year, for an average next 12-month (NTM) forecast of $19.4 billion.

Therefore, assuming that over that period Intuit makes a 30% FCF margin in free cash flow (i.e., average between 28.5% an 31.36%), its FCF will be:

     $19.4b NTM revenue x 0.30 = $5.82 billion NTM FCF

That is 11.9% higher than its TTM FCF of $5.2 billion (see above) and implies that INTU could be worth much more.

Target Price for INTU Stock

One way to value INTU stock is to use an FCF yield metric. This assumes that 100% of its FCF would be paid out as dividends. 

Right now the stock has an FCF yield of 2.86%. This can be seen by dividing the TTM FCF by today's market cap:

   $5.203b / $181.89b market cap = 0.0286 = 2.86% LTM FCF Yield

In other words, the market is saying that if the company were to pay out 100% of its FCF in dividends the stock would have a 2.86% dividend yield.

Therefore, let' apply that to our NTM FCF forecast:

  $5.82b NTM FCF / 0.0286 = $203.5 billion;  $203b / $181.89b mkt cap = +11.89%

This implies that INTU stock is worth about 12% more. However, with the company's higher FCF, the market will likely give the stock a lower dividend yield, say 2.50%:

  $5.82b FCF / 0.025 = $232.8b, or +28% higher than its present $181.89b mkt cap.

So, on average the stock could be worth about 20% higher (i.e., (+28% +12%)/2 = 20%), or $779 per share:

   $649 p/sh x 1.20 = $778.80

Analysts Agree

Wall Street analysts have been raising their price targets. For example, Yahoo! Finance's survey of 32 analysts has an average price target of $724.92 p/sh, up from $720.72 in my prior article. Similarly, Barchart's survey shows a mean price target of $730.24, up from $717.12 in August.

AnaChart.com, which tracks analysts' price targets against the underlying stock price, shows that the average price of 24 analysts is $712.43.  Moreover, the table below shows that a number of these analysts who have good track records have raised their targets in the last 2 days:

INTU - AnaChart.com - Nov. 25, 2024

For example, these analysts have hit their price target about 90% of the time, as can be seen in the “Price Targets Met Ratio” column.

The bottom line is that INTU stock looks cheap here from three standpoints:

•    its dividend yield is still below the historical average
•   based on an FCF margin and FCF yield valuation metric INTU stock looks undervalued
•   analysts have higher price targets for the stock

This could augur well for INTU stock over the next 12 months.  In a follow-up article I will show investors can play this opportunity by shorting out-of-the-money (OTM) puts and buying long-term call options (LEAPs). So, stay tuned.