The past few years have been, well, taxing for H&R Block (NYSE:HRB). Since 2008, the stock price has fallen from $25 to $15.85. The recession has taken a big toll as well as the growing competition.
However, during the latest tax season there were some hopeful signs. H&R Block generated a profit of $419.4 million, or $1.35 a share. There was a
3.6% increase in total retail tax returns. And the digital business saw a 28.7% spike in online filings. In addition, there were improvements in
client satisfaction and retention rates.
But can H&R Block continue with its progress and generate nice returns for shareholders? Let’s take a look at the pros and cons:
Pros
Tax leader. H&R Block has more than 100,000 trained tax professionals and prepares one out of every seven returns in the U.S. Keep in
mind that it has a retail office within about five miles of most Americans.
H&R Block also has been aggressive in providing do-it-yourself software and web options. To this end, the company agreed to purchase Taxact. However, the Justice Department filed an injunction to prevent the acquisition. H&R Block plans to fight this ruling.
Restructuring. H&R Block has taken tough measures to streamline its operations. During the past two years, it has sold off more than 500 company-owned offices. At the same time, there were closures of 1,700 locations, of which more than 1,000 were in Wal-Mart (NYSE:WMT) stores.
Add-ons. When preparing tax returns, H&R Block has an opportunity to provide more products and services. After all, the company has deep insights into the finances of each customer.
One smart product is the Prepaid Emerald MasterCard. Basically, customers can receive their refund in a debit card, which can
then be used for everyday purchases. It’s a great way to get recurring fees as well as bolster customer loyalty.
Cons
Regulations. A big source of revenue for H&R Block has been refund anticipation loans. Yet because of regulatory scrutiny, the company’s financing partner, HSBC Holdings, terminated the program. As a result, H&R Block was not able to offer such loans in its tax offices for the prior
season.
Competition. While H&R Block has a massive retail footprint, the market is still full of competitors. These include independently owned locations
as well as emerging chains, like Liberty Tax. There are also a variety of regional CPA firms.
However, perhaps the most threatening competition comes from online providers — the largest is Intuit (Nasdaq:INTU), which operates the TurboTax franchise.
Higher-end businesses. H&R block operates RSM McGladrey, which provides tax and consulting services primarily to midsize businesses. However, the company has been weak lately. In the latest quarter, revenue fell by 3.5%.
Verdict
It looks like H&R Block is on the mend. It has been restructuring its operations and should benefit from the move to digital filings. More importantly, the cash flows are substantial. Consider that the stock has a nice 3.7% dividend yield.
No doubt, there will always be a need for tax help. If anything, the tax code will only get more complicated.
Yet the business is highly cyclical. Thus, there will likely not be any catalysts until the start of the tax season in 2012. Since there is no rush to get into the stock, the cons outweigh the pros for now.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
