L1 Capital International Fund released its Q3 2020 Investor Letter, a copy of which you can download here. The Fund posted a return of 5.1% for the quarter, outperforming the benchmark Index which returned 3.7% in the same quarter. You should check out L1 Capital International Fund’s top 5 stock picks for investors to buy right now, which could be the biggest winners of 2021.
In the Q3 2020 Investor Letter, L1 Capital International Fund highlighted a few stocks and Intuit Inc (NASDAQ:INTU) is one of them. Intuit Inc (NASDAQ:INTU) is a software company. In the last one year, Intuit Inc (NASDAQ:INTU) stock gained 36% and on January 8th it had a closing price of $374.46. Here is what L1 Capital International Fund said:
“Intuit epitomises the consistency, predictability and longevity of growth we seek in high quality businesses.
Intuit currently operates through 2 main divisions:
- Software for financial and business management as well as integrated payroll solutions, merchant payment processing solutions, and financing for small businesses in the US and key global markets; and
- Do‑it‑yourself and assisted income tax preparation software products and services sold in the U.S. and Canada.
Intuit also provides personal financial software and services through its Mint and Turbo products and has announced the acquisition of Credit Karma for US$7.1 billion which will significantly expand its personal finance capabilities, creating a third leg to Intuit’s growth stool.
Intuit’s tax capabilities also include software and services for professional accountants in the United States and Canada.
Intuit has made 5 “big bets” which extend across its divisions and drive its operating strategy and growth profile:
- Utilisation of Artificial Intelligence (AI) and customer insight (based on unique data) to make products simpler and to increase the speed of product enhancements – many of Intuit’s products are “do it for myself” applications and AI can facilitate self‑help and ease of use.
- Connecting people to experts – QuickBooks Live, TurboTax Live and Mint Live enable customers to speak to independent experts to solve their issues, increasing the number of customers, engagement levels, and revenue per customer.
- Facilitating “smart money decisions” by connecting customers with financial offerings that save them money – there are now 22 million registered users of Turbo and this division will be significantly expanded through Credit Karma’s over 100 million members (37 million monthly active users) once the acquisition completes.
- Becoming “the source of truth for a business”, not just “the source of truth for your books” – Intuit aims to assist small business customers get paid fast, manage capital, pay employees and grow in an omnichannel world. Intuit has unique capabilities through the integrated QuickBooks software, Payroll, Payments and QuickBooks Cash bank account, facilitating payments ($65 billion charge volume) and optimising cashflow management.
- Disrupt the market for accounting software for businesses with 10 to 100 employees – QuickBooks’ traditional strength lies with smaller businesses but QuickBooks Advanced expands the product’s capabilities to fully service larger businesses at a very competitive price point, albeit multiples of the standard QuickBooks price.
These “big bets” support consistent, predictable growth in all of Intuit’s key businesses:
- QuickBooks Online (QBO) dominates the United States small business accounting software industry. QuickBooks has a total of 4.6 million US customers, compared to Xero which only has 241,000 customers across the United States and Canada combined. Businesses in the United States are well behind Australian businesses in adoption of online accounting software. Intuit estimates there are 48 million small businesses and self‑employed potential customers in the United States. International opportunities are also immense with QBO having over 1.2 million customers in the United Kingdom, Canada and Australia compared to over 10 million serviceable small businesses. Flags have also been planted in other markets with significant long‑term potential such as France and Brazil. Management aims to grow QBO ecosystem (including associated services) revenue by 30% per annum and has exceeded this target for the past 4 years. QBO ecosystem accounted for 6% of Intuit’s group revenue in FY2012, 28% in FY2020 and we expect will account for around 50% of Intuit’s total revenue by FY2025.
- TurboTax is driving the transition of tax preparation to online, self‑service and assisted channels away from traditional tax preparation stores. TurboTax makes the necessity of filing tax returns quicker, cheaper, and facilitates maximising tax refunds. TurboTax already supports the filing of 30% of all tax returns in the United States, yet only accounts for around 13% of revenue spent on filing tax returns. We expect TurboTax’s share of total returns to continue to increase. Over the past 6 years TurboTax’s revenue has increased at a 10% average annual growth rate. Through the development of TurboTax Live and other products Intuit will be able to generate increased revenue per average filing, supporting its medium‑term target of 8% to 12% revenue growth for this division.
We believe the best is yet to come for Intuit, requiring a vision of future potential that is only just beginning to be realised. Through QuickBooks, Intuit has unique, comprehensive customer data, and can be the “source of truth” for small businesses. Intuit can assist its customers use their data to save money improve cashflows, such as optimising working capital, financing terms and business requirements such as insurance.
The same opportunity exists in helping individuals optimise their financial position, combining tax return information with Turbo, Mint and, in time, Credit Karma, to not only enhance tax refunds, but also lower borrowing costs, increase savings rates and reduce expenses.
All these opportunities do not come cheaply. In FY2020 Intuit generated revenue of US$7.7 billion across the group and fully expensed US$1.2 billion or 16% of revenue on research and development activities. In comparison, in FY2020 Xero had total revenue of around US$0.5 billion and spent around US$160 million on product design and development costs (of which 45% was capitalised). We believe Intuit’s dominant market position will continue to strengthen due to its much greater size and scope of activities, and ongoing investment in its business.
Intuit’s financial profile is exceptionally attractive:
- Consistent, sustainable revenue growth – annual revenue growth has ranged between 11% and 16% over the past 5 years and we expect Intuit to continue to generate double digit revenue growth over the medium term, with growth increasing as QBO becomes an increasing share of total revenue;
- High margins – operating margins are approximately 30% and management targets increasing operating profit at a faster rate than revenue growth. We expect sustained operating leverage in conjunction with increasing ongoing investment in growth initiatives;
- Very high cash conversion – reflecting being paid upfront and negative working capital;
- Limited capital requirements to support organic growth – growth has been organically funded, with Intuit last raising equity capital over 20 years ago. Capital expenditure is less than 2% of revenue;
- High returns on invested capital – book capital is minimal and returns on invested capital are exceptionally high; and
- Strong financial position – Intuit has US$3.7 billion net cash. Net cash will be approximately nil after completion of the US$7.1 billion acquisition of Credit Karma (funded 50% cash, 50% equity). Intuit generated operating profit of over US$2.2 billion in FY2020 and has the financial strength to withstand a challenging operating environment for small businesses caused by COVID‑19.
Management is led by Sasan Goodarzi who has held senior management positions at Intuit for the past 14 years. Scott Cook co‑founded Intuit in 1983 and remains a Board member and significant shareholder.
Intuit is trading on around 30x FY2021 EBITA, 42x FY 2021 PE, 2.5% free cashflow yield and provides a dividend yield of around 1%. While the near‑term earnings and cashflow multiples optically are relatively high, we believe they fairly reflect Intuit’s attractive business, industry, management and financial attributes, including its consistent, predictable and long‑term growth profile. Intuit will continue to deliver strong value to shareholders for many years to come, with our base case implying a double‑digit annual return for this investment.”
In Q3 2020, the number of bullish hedge fund positions on Intuit Inc (NASDAQ:INTU) stock increased by about 2% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in Intuit’s growth potential. Our calculations showed that Intuit Inc (NASDAQ:INTU) isn’t ranked among the 30 most popular stocks among hedge funds.
The top 10 stocks among hedge funds returned 216% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 121 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
Video: Top 5 Stocks Among Hedge Funds
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Disclosure: None. This article is originally published at Insider Monkey.