Intuit is more than just TurboTax

There are three main ways to invest in the cloud. One way is to invest in the infrastructural plays that help to create it. Another is to buy companies whose internal operations are benefiting from utilizing the cloud. The third option is to invest in software companies that are shifting into selling software as a service, or SaaS. The poster boy of the last option is Intuit. It's time to take a close look.

Intuit's two key growth drivers
Intuit's stock is peculiar because it has its very own trading dynamic. Most of its profit is made during the all-important tax season. Subsequently, investors are mainly focused on its tax software's fortunes during the spring quarter.

Source:company accounts.

After the tax season quarter, the attention turns toward its small business group (SBG) offerings. Attention shifts back once the tax season comes around again. Intuit isn't just about taxes, though.

In fact, in its last fiscal year, consumer tax only contributed 45% of full-year revenues. Furthermore, its guidance for 2014 implies that Consumer tax (consumer group) and pro tax will only make up 49% of revenue. Moreover its tax operations are only growing in low single-digits while, the SBG's growth is in the more impressive low-teens range.

2014 Guidance	Revenue	Growth
SBG	2290	10%-12%
Consumer Group	1778	3%-5%
ProTAx Group	413	0%-4%

 Source: Company presentations.

Moving into 2014, Foolish investors should be focused on two things with Intuit. First of all, they should look at its plans to ensure a solid tax return season. Secondly, they should watch the ongoing development of an ecosystem within its SBG.

Intuit's disappointing 2012 tax season
Unfortunately, Intuit's last tax season was somewhat disappointing for a number of reasons:

• Overall tax returns were lower than its internal expectations due to a difficult tax season

• The software category overall only took a 1% share from manual, when Intuit had expected 2%

•  Intuit didn't grow its online market share as expected, and smaller competitors took market share

Intuit's rival, H&R Block, also confirmed that the tax season was uniquely difficult this year:

"We expected...  ...the season would normalize to historical growth rates of 1% to 2%...  ...we had little reason to believe that growth levels this year would be different than average historical levels.

Instead, at season's end, IRS returns were down approximately 1%, a result no one was expecting."

In addition, investors in Intuit and H&R Block have some cause for concern in 2014. According to Intuit's management, the IRS is talking about "some delays to the start of tax season again this year." While this is likely to be a timing issue, there is a danger that it could indicate a more complex tax season.

Intuit is making some changes to its tax strategy this year. The company is trying to move away from heavy advertising during the tax season, and more toward simplifying its products and ensuring customer retention. This sort of strategy is very much in line with the advantages of SaaS. In other words, SaaS solutions help to reduce customer churn because they tend to involve more of an ongoing interaction than a one-off software sale does.

Intuit develops an ecosystem
Its second major strategic focus is to develop an ecosystem around its various offerings in its SBG segment. The idea is use the cloud in order to cross-sell its financial management, payment, and employee management solutions (which make up the SBG and account for 37% of segment profits.) Furthermore, its tax refund customers can plan how to utilize their refunds by using the lower end of Intuit's accounting and financial planning software, QuickBooks.

QuickBooks is also undergoing a refresh which is being rolled out to existing QuickBooks online and desktop publishers. Again, a big part of the plan is to encourage its desktop customers to convert to its online offering. Intuit outlined that it now had over 500,000 QuickBooks online subscribers, up by 29% from the previous quarter. This provides more power to Intuit's ecosystem.

A competitive market
One downside to all of this is that Intuit's markets are getting ever more competitive. Paychex has recently launched an online accountancy offering targeted at small business. While this a relatively late move, it still represents the principle of moving to the cloud in order to cross-fertilize its payroll and HR services. Automatic Data Processing's  also competes with both companies in online payroll, and its Vantage product is a cloud-based suite designed to integrate ADP's human resources, payroll services, and benefits administration in one package.

The bottom lineIntuit is facing stiffer competition, but it's an early mover in offering SaaS-based solutions. It's also being aggressive about developing its ecosystem, and it remains a prodigious generator of cash flows for investors. For example, Intuit generated $1.24 billion in free-cash flow last year, representing around 5.8% of its market cap. With analysts forecasting 11% EPS growth for the next couple of years, Intuit looks like a good value.

Which Stocks to Buy if Interest Rates go up

Equity investors can be guilty of ignoring the repercussions of bond-market movements, but Foolish investors might not want to be so complacent. Year to date, 10-year Treasury rates have gone up significantly, and even though it's a less than 1% move, it represents a near 50% increase in the rate. The economic impact has already been felt in some ways, and it's time to look at which stocks could benefit if rates rise further.

Rates on the move
Here's how the benchmark 10-year U.S. Treasury yield has moved this year:

Source: Yahoo! Finance.

Clearly, rates have moved up recently. In addition, its noticeable how low they still are when compared to previous years. So, which stocks can outperform if they move up?

Rates up + economy up = time to buy financials
Financials will benefit in this scenario because an improving economy will bring increased loan demand, while rising rates should increase net interest margins for the financials.

For example, although Wells Fargo  recently reported record quarterly net income, its net interest margin has been declining for more than a year now.

Source: Company presentations.

An improving housing market, however, will aid its mortgage loan origination business, and increased interest rates should help it issue loans and mortgages at higher rates than it has in the last year or so.

A similar dynamic applies to a lender like Capital One Financial . Wells Fargo and Capital One have been challenged over the last few years because of weak loan demand. In addition, it has been trying to replace loans issued at previously higher rates. The result is that income has come under pressure. However, there are some positive signs. Capital One is known for being a conservative lender, so it's a good sign when its management says this on a conference call:

New originations are growing, and we're seeing more opportunity to increase credit lines for existing customers, which should improve the trajectory of both the loan growth and purchase volume growth over time.

Capital One expects its domestic card-loan growth to turn positive "sometime around the second half of next year."

Rival lender Discover Financial Services   is a somewhat more aggressive lender, and it managed to grow its credit card loans by 4% in its third quarter even while its credit card charge-off rate hit a record low of 2%.

Moreover, its management described the market as being a "very benign credit environment. We don't see any situation where there is any type of a meaningful deterioration in credit in the near-term horizon at all."

Although not a financial, Automatic Data Processing , or ADP, holds large amounts of its payroll clients' funds on its books, from which it earns interest income.

ADP is interesting because its employer services and professional employer organization, or PEO, services are obviously geared to the economy. In addition, the company is achieving margin expansion as its revenue grows. In fact, in its third quarter, employer services (69% of revenue) grew earnings by 15%, and PEO (18% of revenue) did so by 12%. The main reason its total pre-tax earnings only grew around 7% was because lower interest rates took its interest income down by $17.6 million, to $89.2 million. Given higher rates and an improving economy, ADP has plenty of upside.

In a similar vein, payroll specialist Paychex  (NASDAQ: PAYX  )  also holds significant amounts of customers cash on its books. You can see how the cycle works in the following graph.

Source: Company presentations.

As the economy improves, more small business want use Paychex's payroll services. Consequently, the amount of funds held goes up. Meanwhile, interest rates tend to go up, so the amount earned from customer funds goes up. In fact, it went up to around 8% of total revenue in 2007. If the same thing happens over the next few years, Paychex could see a revenue boost from this effect.

The bottom line
Foolish investors need not fear rising rates because they're usually a sign of a stronger economy. With a relatively benign inflation environment, the stocks discussed above have upside. The financial media often frets about higher rates, but Foolish investors can prepare for them and invest accordingly.

Paychex is a Good Dividend Play, but is there More to it?

Earnings from small business service provider Paychex (NASDAQ: PAYX  ) are usually closely followed for three reasons.

First, it's a payroll services segment is a good barometer of current conditions in the small and medium size business market. Second, its results provide good color on the increasingly competitive market for payroll and HR services. Third, and I suspect this is what most of you will be interested in, it's one of the go-to dividend stocks for income seekers.

Paychex gives small businesses some reliefThe company typically generates two-thirds of its services revenue from payroll services, and one-third from its faster growing HR services segment. In general, the first-quarter recent results were positive and tracked quite well against Paychex's full-year guidance.

	Full-Year Guidance	Q1 Results
Payroll Services Growth	3% to 4%	2.4%
HR Services Growth	9% to 10%	11.3%
Total Services Growth	5% to 6%	5.2%
Net Income Growth	8% to 9%	6.3%

Revenue growth matters a lot, because its operating income margins are close to 42%. Superficially, the payroll numbers were weak compared to what Paychex is expecting for the full year, but relatively speaking, they were good.

Going back to its last set of results, Paychex had stated that its key checks per payroll metric only grew 0.9% in the quarter. Furthermore, management had noted that the the number had moderated in the quarter, and the trend was downward. With this in mind, investors would have been right to be fearful of what Paychex would report for Q1.

In the end, checks per payroll grew 1.6% in the quarter, and the weakness in the fourth quarter was put down to a "timing issue." The overall payroll services growth rate was only 2.4%, but Q1 was affected by one less trading day than last year.

In a sense, this is a sigh of relief for commentators watching the small business sector, especially as it mirrors Automatic Data Processing's (NASDAQ: ADP  ) unchanged forecast for its "pays per control" to grow at 2% to 3% this year. Small businesses aren't growing as strong as they have in previous recoveries, but conditions aren't as bad as Paychex's Q4 numbers had previously intimated.

Are conditions getting tougher for Paychex?On the other hand, in Q4, Paychex argued that its full-year outlook for 3% to 4% payroll services growth was mainly predicated on revenue per check rising (rather than checks per payroll) thanks to price increases passed onto customers. However, on the Q1 conference call, Paychex stated:

Revenue per check grew modestly as a result of price increases partially offset by discounting.

To be fair, its revenue per client did increase, so any discounting did not totally takeaway any gains from price increases. However, the modest nature of the net increase, and the need to discount, could be a sign that competition is increasing payroll services.

ADP's forecast (reiterated in August) of 2% to 3% growth in pays per control is higher than employment gains in the overall economy, and ADP argues that its clients have been hiring faster than the national trend. So is Paychex's lower growth rate related to its client base?

Moreover, the payroll services space is getting crowded. ADP, Paychex, and Intuit (NASDAQ: INTU  ) are all trying to develop their software as a service-based offerings. Paychex claims that its SaaS-based SurePayroll solution is growing in the double-digits, and ADP is accelerating sales of its Vantage product, which will integrate HR management, payroll services, and benefits administration.

Meanwhile, Intuit can generate growth for its online payment solution by cross-selling it within its small business group solutions. In fact, Intuit continues to generate mid-teens growth with its payment solutions. In addition, Insperity has launched a SaaS-based payroll solution.

Is the dividend enough to buy the stock?The answer to this question partially lies with your desire for the near-3.5% dividend yield that Paychex currently generates for you. It's certainly a lot higher than the current 2.65% yield on a 10-year U.S. Treasury bill, but is it as safe over the next 10 years? The payroll services market is getting crowded, and it's not clear who will be the long-term winner out of the move to SaaS.

Moreover, Paychex paid out around 83% of its free cash flow in dividends last year, so it's difficult to see much scope for strong dividend increases in the near term.

In conclusion, the stock will continue to attract dividend seekers in a low interest rate environment. However, for long-term investors, paying 25 times earnings for a highly cyclical stock within increasingly competitive markets might appear a bit rich.