How Investors Can Profit From Tax Season

by Ryan Fitzwater, Director of Research, The Oxford Club
profit-from-2015-tax-season-Intuit-INTU-2

“In this world nothing can be said to be certain, except death and taxes. –Benjamin Franklin

Tax season is officially underway.

Already the IRS has received over 14 million returns and has issued refunds to 7.6 million filers for an average of $3,539 each.

And it should come as no surprise that those eager early filers tend to be folks who are expecting a large refund. As we approach the April 15 filing deadline, the size of the average refund should progressively shrink.

In the end, around 20% of filers will end up owing the IRS.

If you’re waiting till the last minute to open up your checkbook, I don’t blame you. But I do have some good news...

There is a way to get back some of the hard-earned cash you’re about to fork over to Uncle Sam. I’m talking about holding shares of a company that profits immensely from tax season…

The E-Filing Revolution

If you’re lucky enough to get a refund, you’ll notice that the IRS has become much more efficient in cutting checks. This is thanks to electronic filing. (Folks who wind up owing Sam: you’ll notice he’s much more efficient at collecting money as well.)

So far this year, roughly 95% of filings were submitted electronically. And odds are, the 136 million submissions yet to come will only further this trend.

Here’s what’s interesting for investors though…

Despite the fact that the IRS lets you file directly on its website, many Americans will opt instead to use software by TaxACT or H&R Block (NYSE: HRB)...

And the vast majority will rely on Turbo Tax.

Profiting From Tax Season

In 2013, 28 million people used Turbo Tax to prepare and file their taxes.

The company behind the software, Intuit Inc. (Nasdaq: INTU), also created renowned accounting and finance products Quickbooks and Quicken.

As e-filing became the norm over the past decade-plus, Intuit’s Turbo Tax brand took off.

In 2004, consumer tax products brought in $490 million in revenue for the company. Fast-forward to fiscal year 2014, that number has more than tripled to $1.52 billion.

During this same time period, Intuit’s customer products segment has averaged 12.17% year-over-year sales growth. And as a result, shares have substantially outperformed the market - beating the S&P 500’s 10-year return 2.3 times over.

And there is no doubt that now is the most profitable time of the year for Intuit.

As you can see in the chart above, the bulk of the company’s sales come in when it posts third quarter numbers each year. Not shocking since that’s the period covering February through April – the heart of tax season.

(The Oxford Club’s Emerging Trends Strategist Matthew Carr loves charts like this due to their “seasonal saw-tooth pattern.” To learn how he uses these charts to lock in profits like clockwork, you should enroll in his Prime Profits Secrets course. Click here for details.)

Over the last five years, earnings-per-share (EPS) growth in the third quarter has averaged 16.84%. While quarters one, two and four have averaged 9.78%, 1.25% and 6.15%, respectively. Historically speaking, now is a great time to pick up shares of Intuit.

But there are two recent events you should know about first...

Operational Speed Bumps

First, at the beginning of this year, Intuit got slammed by customers when it tried to charge existing users for a more expensive level of Turbo Tax.

After taking a severe scolding on the Web, the company backtracked. It apologized to customers and offered a $25 rebate to anyone who had already been upgraded.

The next speed bump occurred last Thursday when Intuit had to halt e-filing of all state returns. This was after more than a dozen states spotted fraudulent activity through Turbo Tax’s systems. Criminals with stolen identities were trying to falsely claim refunds.

Subsequently, cybersecurity headlines dominated the company’s newsfeed. Of course, Intuit is just the latest victim of what my colleague Rachel Gearhart recently dubbed “America’s Challenge of the Century.”

The company resumed state income tax e-filing last Friday, but the damage was already done to its share price. Intuit ended the day down 4.2%. Year to date, shares are down 3.8%.

But considering this company’s history of taking off in the third quarter, we may just be looking at an opportunity to buy shares at a discount.

Let’s see how the company performs on our Investment U Fundamental Factor Test. This will help us evaluate Intuit’s current financial health and give us a rating on the stock.

Earnings-per-Share (EPS) Growth: In its most recent quarterly report, Intuit posted EPS of -$0.23. Besides being negative, that is a three cent drop in EPS compared to the same period a year ago. While we already know that historically the third quarter is Intuit’s best, the first quarter is normally its second best for EPS growth. It whiffed here.

Price-to-Earnings (P/E): Intuit’s P/E of 31.85 is well below the industry average of 55.64. It is well priced on an earnings basis.

Debt-to-Equity : Intuit’s debt load of 17.05% is four times smaller than its peer average of 70.38%. Good to see a company that provides accounting software that’s not overleveraged.

Free Cash Flow per Share Growth : In the most recent quarter, Intuit saw a 26.49% increase in free cash flow. That should help fund some of the refunds it recently paid to angry customers.

Profit Margins : Intuit’s trailing 12-month profit margins of 18.31% are well above the industry average of 14.90%.

Return on Equity : The Turbo Tax provider closes out our last metric on a very positive note. Its return on equity of 31.99% is crushing the industry average of 8.08%.

As Intuit sails into tax season, passing five out of six key metrics, it has earned itself an “A” rating. While we cannot be certain those recent negative events won’t push shares down in the short term, as Ben Franklin famously noted, we can be certain that taxes will be levied. And Intuit will be right there, ready to make the filing process as easy and as quick as possible for millions of users.

*Why did we look at these specific metrics? Find out more here.

Fundamental Factor Test Score

A: Strong Buy (Hits five or more key metrics)

Please note that our fundamental factor checklist is just the first step in performing your own due diligence. There are many other factors you should consider before investing. That’s why The Oxford Club offers over a dozen newsletters and trading advisories all aimed at helping investors grow and maintain their wealth. For more details, click here.

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