H & R Block Inc (NYSE:HRB) reported “earnings” on Tuesday that were better than last year’s results. I write earnings in parenthesis because HRB stock actually reported a loss.
Like virtually all income tax preparation companies, HRB makes the vast majority of its revenue and all of its earnings in the first four months of the year. The rest of the year is generally dedicated to keeping losses as small as possible.
So the fact that HRB stock delivered a loss from continuing operations of $121 million compared to a loss of $150.5 million last year is pretty darn good news. That’s because in the quarter ending Jan. 31, revenues increased $37 million to $488.4 million, which came on the back of revenue increases both for tax preparation and for the company’s other products.
HRB experienced a $28 million expense increase that was partially offset by a $19 million decrease in selling, general and administrative expenses.
Over the previous nine months, meaning the three quarters in which H&R Block stock is losing money, the net loss from continuing operations improved by $20 million to a loss of $562 million. The good news here again was a $50 million increase in service revenues in a $10 million increase in royalty, product and other revenues.
The net losses from continuing operations during these horrible nine months is just part and parcel of the tax preparation business, whether it be HRB stock or a mom-and-pop operation located in Wichita. If you run the tax prep business properly, then you end up with a profit during the first four months of the year, that more than offsets all the losses, and ideally that profit is substantial.
The tax-preparation industry should see a significant bump next year, and quite possibly for many years after, as all the changes from the recent tax cuts filter through the tax code and tax system. Therefore, I would expect significant new volume for HRB stock next year.
More Positives for HRB Stock?
The other positive aspect about the tax preparation business is that individuals that have their taxes prepared for them rarely decide to take on that burden themselves. Thus tax-preparation service providers often earn customers for life. There is competition to a certain degree, HRB is not the only player in the industry, but it is the largest and most well-known. That gives it a brand advantage.
Now that the Consumer Financial Protection Bureau appears to be crumbling, H&R Block and many other tax preparation services, may be able to move back into charging significant fees for tax refund anticipation loans. These loans had been gaining significant momentum until the Obama administration decided to shut them down.
Thus, H&R Block stock is well-positioned for the future. It is financially in solid shape, with $187 million of cash on hand. I’m not crazy about the $2.28 billion in long-term debt. However, the company paid down that amount by almost $300 million in the past year.
The other good news is that HRB stock is benefiting from a fairly broad selection of products. In addition to tax preparation fees and royalties from franchises, they charge fees for refund transfers, and generate revenues from their Emerald card, their peace of mind product (an extended service plan) and their Emerald advance product.
I like where H&R Block stock is heading and I think buying around this general price and holding for the long-term could be a pretty good idea.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
