Its crunch time for H&R Block (HRB).
The bulk of the company’s revenues come from February to April. Unfortunately, in its latest earnings report, the results were pretty bad.
Revenues plunged by 57% to $199.8 million, and there was a loss of $214.7 million, or 78 cents per share. The Street, on the other hand, was looking for revenues of $519.3 million and a loss of 11 cents per share.
What happened? Well, there was a reasonable explanation: The IRS delayed the time to e-file returns (because of the shutdown of the federal government last year). In other words, a big chunk of the revenues will shift to the next quarter. So there was nothing to panic about.
Yet is HRB stock a good buy at current levels? Or should investors wait? To see, let’s take a look at the pros and cons:
HRB Stock Pros
Brand and Scale: H&R Block has 12,000 offices and 80,000 preparers, and it prepares one out of every six tax returns in the U.S. But just a few years ago, H&R Block was struggling. For the most part, the company got sunk in the mortgage mess and neglected its core tax business. The good news is that the company’s new CEO Bill Cobb has pulled off a solid turnaround. He has refurbished the retail locations and added more digital products, such as mobile apps. As a result, HRB stock has doubled since 2012.
Catalysts: Let’s face it, the tax code is not likely to get any easier. That’s certainly good news for HRB stock. For example, Obamacare has added another layer of complexity to filing taxes, which is likely to encourage more people to use services like H&R Block. There is also a deal with online insurance operator GoHealth to allow HRB customers to purchase healthcare policies. But H&R Block also has lots of opportunities in foreign markets. So far, the company has promising footprints in Australia, Canada, India and Brazil.
Financials. The company’s financials are solid. For the most part, H&R Block has a strong source of recurring revenues. The margins are also juicy. During the last 12 months, EBITDA came to 589.99 million. With the cash, H&R Block has been aggressively buying back HRB stock and paying out dividends (the company has made payments for 206 consecutive quarters). The current yield on HRB stock is a reasonable 2.6%.
HRB Stock Cons
Digital: While H&R Block has a good set of online and mobile products, the fact is that a big chunk of business comes from its retail operation. Over time, this could be threated, as seen with other industries like video rentals. No doubt, H&R Block faces intense competition from top digitial providers, such as Intuit’s (INTU) TurboTax, TaxSlayer.com and Blucora’s (BCOR) TaxAct.
Market Growth: Last year was particularly tough for the tax preparation business. There were last minute tax changes — because of the budget showdown on Capitol Hill — as well as delays in filings. The continued softness in the U.S. economy was an issue as well. But Cobb is expecting improvement in 2014. He’s looking for a 1% growth rate in tax filings. Yet this is still modest growth and means that there might not be much of a surprise factor for the stock.
Liability Exposure: As with other tax preparer firms, H&R Block has been the target of litigation because of its refund anticipation loan program. One court ruling indicated that it should be considered a loan and, as a result, subject to the truth-in-lending laws. H&R Block, of course, believes its products were fine. But it is far from clear what the impact from the litigation will be.
HRB Stock Verdict
H&R Block has posted a nice turnaround. The company is much more focused nowadays and has a better cost structure. It has also taken the tough steps to clean up problems with its mortgage business.
H&R Block has also seen lots of traction with providing add-on products, such as the Emerald Card. There are also opportunities with Obamacare assistance as well as market expansion into other countries.
Despite all those improvements, it could still be tough to continue to grow since the number of filings in the US appears to have stalled. Besides, HRB stock has already factored in much of the benefits from the turnaround.
So should you buy HRB stock? No — for now, there don’t appear to be any catalysts to get the shares moving.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.