Good Results Keep ETP A Buy

We are reiterating our Buy rating on Energy Transfer Partners, L.P. (ETP) units following the partnership's better-than-expected quarterly results, reflecting contribution from acquisitions and organic growth projects.

Importantly, the partnership increased its quarterly cash distribution by 2.3% to the annualized run rate of $3.38 per unit, cementing its position as a premier growth MLP. We estimate that Energy Transfer can sustain distribution growth of around 10% annually over the next few years.

We expect distribution growth to be driven by the completion of a broad array of intrastate and interstate expansion projects. On a distribution yield basis, ETP common units are currently trading at a slight discount to the peer pipeline MLP group average (lower yield = higher value). This represents a 379 basis points (bps) spread over the 10-year Treasury bond, compared to the peer group's average spread of 377 bps.

Given the partnership's relatively comfortable distribution coverage ratio and higher growth prospects, we continue to see upside from current levels. We expect the yield spreads to narrow in the coming days, particularly for higher quality names such as Energy Transfer, as market conditions stabilize. Our new $52 price objective, reduced from $55 before, reflects a distribution run rate of $3.71 per unit, a 10% increase from the current level, and yield of 7.15%, reflecting a 265 bps spread over our new 10-year Treasury bond yield expectation of 4.5% over the next 12 months.

Valuation Keeping INTU A Hold

Intuit, Inc. (INTU) reported revenues of $835 million were up 27% from a year ago, but was just short of our estimate of $845 million. The year-over-year growth was driven by acquisition of Digital Insight in February 2007 and strong performance in Consumer Tax. GAAP net income was $115.2 million. Non-GAAP net income came in at $137.7 million or $0.40 per share, beating our estimate of $0.35. Going forward, Q3 is a seasonally strong quarter. QuickBooks-related revenue increased only 5%, to $175 million. Although this result was roughly in-line with our estimate, it was below management's plan, due to lower-than-expected unit growth.
QuickBooks growth is expected to be 5% to 7%, down from the previous range of 8% to 12% due to lower category growth expectations. However, Intuit is hopeful that its back-end loaded marketing efforts can lead to better results. Payroll and Payments are expected to advance 5% to 9%. Excluding the sale of its fully outsourced payroll customers, the category would grow 12% to 16%. Consumer Tax is expected to grow 8% to 12%, versus the 15% in 2007. Despite the positive start to the season, the high end, in our view, appears aggressive given units only rose 5% in fiscal 2007. The company does not expect the filing interruption last year to cause any material impact on this year's tax results.

At the same time, given Intuit's proven track record of margin expansion since FY2000, we think is has reached a plateau. Operating margin kept rising from 13% in FY2000 to 28% in FY2006, and has remained at that level since (on a yearly basis). We expect similar operating margin performance for FY2008, although there may be a slight up-tick as more customers migrate to the company's higher margin online filing. Based on valuation, we are maintaining our Hold rating on the stock.