NEW YORK (CNN/Money) -
Selling your company to Microsoft is the technology equivalent of selling your soul to the devil. That's what makes Intuit, which reported better than expected earnings on Feb. 13, so compelling.
Way back in 1994, Intuit was oh so close to joining the dark side, but an agreed sale to Microsoft fell apart in 1995 after the Department of Justice -- in a brilliant bit of foreshadowing -- threatened to sue Microsoft for antitrust practices.
At the time, Intuit's Quicken and Microsoft's Money combined for more than 90 percent of the personal-finance software market. (Quicken had nearly 70 percent share.)
Intuit's (INTU: Research, Estimates) stock fell nearly 17 percent after Microsoft pulled the plug. Many software analysts thought that despite Intuit's big market share lead, Microsoft would regroup and come up with an improved and of course, embedded, tool that would, uh, quicken, Intuit's demise.
After all, many Microsoft (MSFT: up $1.31 to $48.30, Research, Estimates) critics contend the company's success is not really about innovation but benefiting from the 3 M's (not to be confused with the duct tape maker) of marketing, money ($43 billion in cash!) and, oh yeah, a monopoly.
Holding onto customers and growing
But, instead of getting squashed like a puny little bug by the folks in Redmond, Wash., Intuit has not only survived, it has thrived.
Take a look at the stock chart to the right. It compares Intuit's stock performance over the past five years to Microsoft's. Intuit shareholders have done significantly better.
One reason is that banks and other financial services companies were more eager to partner with a stand-alone Intuit for online banking and bill paying initiatives, mainly out of fear Gates & Co. were seeking to become the First National Bank of Windows.
Customers remained loyal to Quicken and its other mainstay product, tax preparation software TurboTax. In fact, Microsoft gave up making its own tax software in 2000 and partnered with H&R Block, which has its own software called TaxCut, instead.
Plus, Intuit has gone on an acquisition spree of its own. Intuit now owns a streaming quote feed service and a payroll outsourcing business, for example. It also bought an online mortgage bank in 1999 and sold it for a small gain last year.
Paying the Tax Man
But, Intuit is still mainly known for Quicken and TurboTax, which is not a bad thing. Richard Williams, a strategist at Summit Analytic Partners, an independent research firm that focuses primarily on software stocks, says Intuit's personal-finance software business gives it stable earnings growth. He says it's the proverbial cash cow since people have to do their taxes every year.
Intuit's best two quarters are typically its fiscal second and third quarters, which end in January and April. Intuit reported fiscal second quarter earnings, excluding one-time items, of 61 cents a share, beating estimates by four cents. And the company is expected to post earnings per share of $1.07 in the third quarter, a 43 percent gain from a year ago.
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Williams says he is a little worried about valuation, since the stock, at about $42, is trading at 31 times earnings estimates for this fiscal year, which ends in July. He thinks given the broader market's woes, the stock could pull back a bit in the near-term even though Thursday's earnings report was good.
But, the stock does seem like a relatively safe bet for the long-term investor. Earnings are expected to increase 18 percent this year (the company reaffirmed this target last week) and another 18 percent in fiscal 2004. Even though Intuit has a history of making acquisitions, it has a pristine balance sheet with about $860 million in cash and just $14 million in long-term debt.
Microsoft has tried, in vain, to gain ground on Intuit for nearly eight years. This David may not have exactly slain Goliath, but it certainly has hit the creature with enough stones to score some major points.
And you've gotta love a victorious underdog.