Unfortunately for H & R Block Inc (HRB), the tax business hinges on the action from January to April, and H&R’s performance was fairly awful. Wall Street isn’t taking any excuses, sending HRB stock down by about 15% in afternoon trading Wednesday.
Yes, it’s brutal; but this could actually be an opportunity for value investors, especially since HRB sports a decent dividend yield of nearly 4%. But let’s first see what’s happening with the core business.
According to a preliminary release, HRB suffered a 5.8% drop in tax-return volume to 12.2 million (keep in mind that the full earnings report will come out on June 9). The fall came early in the year, in which there was weakness with 1040EA filings as well as the returns for the Earned Income Tax Credit.
It’s not clear why this happened, but it could be an ominous sign that lower-income people are moving increasingly toward electronic alternatives. This category has seen lots of price competition from rivals like TurboTax from Intuit Inc. (INTU) and TaxAct from Blucora Inc (BCOR).
For example, Intuit raised its revenue guidance to 8% to 9%, up from the prior forecast of 5% to 7%. Something else to consider: During the tax season, HRB saw a 2.6% drop — to 6.72 million — in the software/web business.
HRB is swiftly moving to cut costs, reducing its workforce by 250, or 13%, and to also be more circumspect about new initiatives. But interestingly enough, investors in HRB had some warning.
Back in early March, the company’s shares plunged by nearly 16% on news of its disappointing earnings report for the fiscal third quarter. HRB reported a 6.8% fall in revenues to $475 million and an adjusted loss of 34 cents. The Street was looking for revenues of $502 million and a per-share loss of 24 cents.
HRB: Not Doomed
It’s important to realize that H&R Block has many key advantages. After all, it is the largest tax prep firm in the U.S., has a trusted brand and the EBITDA margins are a juicy 28%. There should also be growth catalysts over the next couple years, from dealing with the complexities of the Affordable Care Act to its investments in mobile technologies for the Apple Inc. (AAPL) and Alphabet Inc (GOOG, GOOGL) platforms.
And yes, HRB is a strong cash generator, with about $1 billion in EBITDA for the past year. In fact, for 213 straight quarters, the company has paid a dividend. That’s for over 53 years! There is also a $3.5 billion share repurchase program in effect.
What’s more, the valuation on HRB is only about 11 times forward earnings. Then again, the stock price has lost about 45% of its value during the past seven months or so. In other words, it looks like much of the bad news is already discounted into the stock.
So, for investors looking for an interesting value play, HRB looks like a good choice. In the meantime, the nearly 4% dividend yield is very attractive.
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.
