HRB - H&R Block

[mhdousa]

I've had my eye on this one for a while, but couldn't have said it any better than Saj Karsan (whose blog is fantastic, btw):

http://www.barelkarsan.com/2010/10/h-block-looks-attractive.html

 

What are folks' thoughts on this?

 

-M

[ericd1]

M-

 

H&R has been on my watch list for a couple of months.

 

I believe as you do -- the stock has been beaten up more than justified over the mortgage issue. The company is trimming payroll to cut expenses, but that won't improve profits very much.

 

I'm been trying to find a catalyst that will unlock some of the company's IV...So far nothing has jumped at me. However the 5%+ dividend offers a reason to start accumulating a position...

 

Anyone else???

 

 

[ExpectedValue]

This is one of those businesses where you really need to visit a few H&R Blocks and talk to individual tax preparers to get a feel for what's going on. Especially the ones that have been around for a while.

 

Just looking at the financials and making an arbitrary prediction on earnings will not cut it.

[mhdousa]

This is one of those businesses where you really need to visit a few H&R Blocks and talk to individual tax preparers to get a feel for what's going on. Especially the ones that have been around for a while.

 

Just looking at the financials and making an arbitrary prediction on earnings will not cut it.

 

Hi Tariq,

Thanks for the reply.  It sounds like you've done this and have a negative impression of the franchise.

Please let me know if I've misinterpreted your reply.

-M

[ExpectedValue]

 

Hi Tariq,

Thanks for the reply.  It sounds like you've done this and have a negative impression of the franchise.

Please let me know if I've misinterpreted your reply.

-M

 

I would just refer you to this:

 

http://highway6.com/images/d1cf77eafbfcfe82992287b75179b858.png

 

That's from SumZero where they rate the ideas posted by buyside analysts. The thing that sticks out to me is that in 4 ideas, over the last 2 years, everyone has so far been wrong. And the common mistake I saw in their analysis was not enough time dedicated to actually talking to people and visiting the HRBs. Ideally you want to speak with a variety of preparers, people who have been doing it for a long time and then some of the new employees and see what kinds of dynamics are at work.

[Guest dealraker]

Nygren and others think the clients are coming back when times get better.  I do not think they are unless the fees fall enough to make it in their best interest.  Both H & R and Jackson franchisees and store owned tend to underpay their taxpreparers which makes them unrewarded for performance/experience- thus high turnover.  Then clients are often disappointed with their service with inexperienced preparers.  It is a bad cycle that seems impossible to correct now that there is an alternative online that is just about--- yes almost--- as easy as sitting in front of a preparere that may not be well-versed.

 

Block and JH have been short term thinkers in a secular changing industry.

 

 

[bookie71]

If I were interested in this company, I would see if you can find out (maybe in 10K) haw much of it's revenue is from RAL's (refund anticipation loans).  These are under fire by consumer groups because of the usurious interest rates charged. On another tax service a client had me review a few years ago, this was almost 1/3 of it's gross income.

[Guest dealraker]

It isn't how much money is RAL's as much as it is how many come to H & R because of the RAL's.  Probably a few.  The bank fees pretty much go to the banks.

[bookie71]

But isn't H & R a bank ?

[Uccmal]

I held HRB for awhile when I was test running the Magic Formula.  Shortly after I bought it they had to restate their corporate tax returns and pay alot of back taxes.  That was the kicker for me and I quickly unloaded it.  I am surprised, and not surprised, that it still appears on value screens five years later.  They were years slow bringing out an online service.  There was huge potential that they missed completely.

[stahleyp]

I held HRB for awhile when I was test running the Magic Formula.  Shortly after I bought it they had to restate their corporate tax returns and pay alot of back taxes.  That was the kicker for me and I quickly unloaded it.  I am surprised, and not surprised, that it still appears on value screens five years later.  They were years slow bringing out an online service.  There was huge potential that they missed completely.

 

it's still on the magic formula page. overall, how was your experience with the magic formula?

[Myth465]

I dont like the business model. It sucks for employees and customers. Plus the IRS has gotten better on refunds. I think now its down to 10 days with a free efile. Sooner or later people are going to start waiting due to the costs. I mean most of these guys have a kid and a W2. Its not like the tax prep is hard.

 

(refund anticipation loans), I havent studied them at all but I would guess this basically is there business.

[bookie71]

The truth in lending statment puts the interest rate at 52% on the one I saw.  This is not business but usury.  Guido the knee breaker would like these rates.

[Myth465]

http://www.boston.com/business/personalfinance/articles/2010/10/23/hr_block_lawsuit_over_tax_refund_program_may_signal_the_end_of_loans/

 

A refund anticipation loan is a short-term loan backed by an expected federal income tax refund. A refund anticipation check is actually an account where a refund is deposited. This enables taxpayers to have their tax return preparation fees deducted from their refund, rather than paying up front. Both products are typically used by low-income customers who file their taxes early in the season.

 

In the lawsuit, H&R Block said about 40 percent of its customers used one of these products during the 2010 tax season. Standard & Poor’s equity analyst Erik Kolb estimated that translated into about $146 million in revenue from the loan products alone — not counting the tax prep fees for the associated returns — or 3.8 percent of the company’s annual revenue.

 

In terms of profit, eliminating the loans could mean a 10-cents-per-share reduction next year, estimated Vance Edelson, an analyst with Morgan Stanley.

 

----

 

As I have said the business model sucks. I have even offered to do a few peoples taxes for free, but they op for H&R due to the same day refund. I think its like pay day lending, it works well when it works. In this economy though  I could see people waiting 10 days for the refund.

[Uccmal]

 

 

it's still on the magic formula page. overall, how was your experience with the magic formula?

 

Hi stahleyp,  RE: Magic Formula.  I chose six stocks at the start.  I read up on each one but found it hard to stick to the formula and eventually gave it up for that reason.  I about broke even after a few months.  UTC (chewing tobacco) did well, making up for 5 dogs.  I never went back to see where the others went except to say that HRB is still there.  The reason I found it hard to stick too is that the companies were not holdings that I came at from a growing circle of competence or comfort.  I was trying to shoehorn them into style. 

 

Mostly what I learned (which was certainly worth the price of Joel's book) was that I Need to know why I am holding a company in order to be able to hold onto it thorough thick & thin.

[stahleyp]

 

 

it's still on the magic formula page. overall, how was your experience with the magic formula?

 

Hi stahleyp,  RE: Magic Formula.  I chose six stocks at the start.  I read up on each one but found it hard to stick to the formula and eventually gave it up for that reason.  I about broke even after a few months.  UTC (chewing tobacco) did well, making up for 5 dogs.  I never went back to see where the others went except to say that HRB is still there.  The reason I found it hard to stick too is that the companies were not holdings that I came at from a growing circle of competence or comfort.  I was trying to shoehorn them into style. 

 

Mostly what I learned (which was certainly worth the price of Joel's book) was that I Need to know why I am holding a company in order to be able to hold onto it thorough thick & thin.

 

Thanks for the input! I've read the book and I'm going to invest a small portion and continue to do it for a number of years...we'll see what happens!

[peterHK]

Interesting selloff today on lower margins next year due to them investing in the business (which is exactly what they should be doing). Estimates are a 3-600bps hit to margins next year.

 

On guided EBITDA margins on next year's $3bn in revenue, they're trading (at the low end of EBITDA guesstimate) at 7x forward EBITDA.

 

On normalized margins of ~28%, they're trading at less than 6x, below their historical average of 7.25x, and at the low end of the renage they've traded in for a while between 6 and 10x.

 

Given we're in the later stages of a cycle this might be a nice long term hold given it's a more defensive business.

 

[Cigarbutt]

Have followed H&R Block and think that there is some franchise value.

The decline seems to be in large part related to the perception that the tax code will become simpler.

 

Assumption #1

The tax code will not become simpler.

https://www.washingtonexaminer.com/look-at-how-many-pages-are-in-the-federal-tax-code

 

Assumption #2

Most people will continue to expect tax refunds at the end of the year and many will continue to pay a commission for faster access to funds.

At this point, about 75-80% of taxpayers receive a tax refund, which is due in large part to over-withholding.

Whereas there may be "rational" explanations for this, IMO, it is simply ingrained in the culture.

Paradoxically, most refunds are relatively small, and the lower income strata are most likely to over-withhold and to obtain an accelerated delivery of the fund even with "transaction" fees. Interestingly, these HRB customers who, in the aggregate, finance consumption with relatively high interest rates, have zero financed the government and use the refunds as a margin of safety.

 

 

My older kids have started to have a salary from summer jobs. The topic came up. Why bother?, they asked. Because. 

 

 

[peterHK]

Have followed H&R Block and think that there is some franchise value.

The decline seems to be in large part related to the perception that the tax code will become simpler.

 

Assumption #1

The tax code will not become simpler.

https://www.washingtonexaminer.com/look-at-how-many-pages-are-in-the-federal-tax-code

 

Assumption #2

Most people will continue to expect tax refunds at the end of the year and many will continue to pay a commission for faster access to funds.

At this point, about 75-80% of taxpayers receive a tax refund, which is due in large part to over-withholding.

Whereas there may be "rational" explanations for this, IMO, it is simply ingrained in the culture.

Paradoxically, most refunds are relatively small, and the lower income strata are most likely to over-withhold and to obtain an accelerated delivery of the fund even with "transaction" fees. Interestingly, these HRB customers who, in the aggregate, finance consumption with relatively high interest rates, have zero financed the government and use the refunds as a margin of safety.

 

 

My older kids have started to have a salary from summer jobs. The topic came up. Why bother?, they asked. Because.

 

I tend to agree on the tax code becoming less complex. I view the current tax rates as fiscally unsustainable for the US, and expect the tax code will keep changing over time, driving a continued need for HRB.

 

On the math:

- this now trades at 6x normalized EV/EBITDA whereas this usually trades at 7.25x, so it’s an 18% discount to historical valuation which has stayed fairly stable for a number of years.

- If the business stays flat (no sales growth), and recovers to normalized EBITDA margins by 2021 after this period of technological investment, then:

- $3bn in sales @ 28% normalized margin = $840mn of EBITDA x 7.25 = $6090 in EV.

- business generates about $$460mn in FCFE, of which $50mn goes to acquisitions and $200mn is paid out in dividends, leaving $200mn (3% yield) to buy back shares.

- So if we do the math:

- $6090, and net debt stays the same = less $50mn net cash = $6050 market cap.

- they can buy back $600mn in stock over the next 3 years at an average cost of say $27, so 22.2mn shares. This is obviously hard to handicap but lets say they buy back 20 million shares.

- so $6050/(209.2-20 shares outstanding) = $32 per share.

 

$32/~$24.50 today = 30% upside = 9% CAGR, plus 4% dividend yield = 13% total returns. Not too bad for a nice stable business.

 

Upside to that comes from any sales growth/margin upside they may see over that time, and I assume those $50mn of acquisitions add no growth when they do add some, so I think you could build a case for 15% total returns from here without too much difficulty, at least at first blush.

 

 

[hasilp89]

I held HRB for awhile when I was test running the Magic Formula.  Shortly after I bought it they had to restate their corporate tax returns and pay alot of back taxes.  That was the kicker for me and I quickly unloaded it.  I am surprised, and not surprised, that it still appears on value screens five years later.  They were years slow bringing out an online service.  There was huge potential that they missed completely.

 

it's still on the magic formula page. overall, how was your experience with the magic formula?

 

Lol it’s still on magicformula, just looked at it briefly. Mgmt expects $950-$1b ebitda in 21 so trading a little over 5x. 5% yield and believe mgmt actively buys back shares. From 15 mins researching the business doesn’t seem like there are many tailwinds, maybe it rerates if mgmt performs in 2021 but don’t really see a long term reason to hold.