About H&R Block
Ah, H&R Block.
The strip mall place of business that’ll help you do your taxes.
One time, I actually went to one of my neighborhood H&R Block venues after my first full year of DoorDashing (yeah, I’m cool, deal with it) so as to consult with a tax professional regarding the tax treatment(s) of technically being considered an independent contractor with the company and navigating the complexities that come with that, and let me just say the tax professional at my local H&R Block did a stellar job in both distilling some of the more nuanced taxation concepts to me as well as helping me find ways (legal ones, of course) to minimize some of the amount I’d have to shell out to Uncle Sam in the future, for example, through thorough mileage tracking.
He gets just about enough of my money, thank you very much.
Thank you, tax professional from H&R Block, you’ve served a Dasher in need quite well.
Not all tax professionals wear capes.
At any rate, most Americans and global citizens have to file their taxes annually, which generally bodes well for a company such as this one, as many would much rather pay H&R Block a few hundred dollars to file their taxes and ensure that one receives the largest refund they possibly can (that is, if any is to be retrieved at all) than go through the stress of doing their own taxes, more than likely rushing to file at the eleventh hour and more often than not being able to extract the biggest refund for their wages and associated deductions.
While this is a positive and a long-term tailwind for a firm such as Kansas City, Missouri-headquartered H&R Block, one of my least favorite things about this company and the industry in which it operates is the fact that it is a very, very seasonal business, and if I had a say in the matter, I’d lean more towards putting investable capital behind a company that is far less seasonal, a prime example being Walmart.
Whatever the time of the year, it is pretty tough to find a Walmart that isn’t filled consumers, and while H&R Block surely isn’t to blame for these circumstances, we will say that its largest competitor, Intuit, which just happens to be the owner of TurboTax among other individual and enterprise offerings, has, well, other business offerings such as banking-style services, credit score products and other solid revenue streams that better round out its business.
Sure, we are big fans of focused businesses, and H&R Block is just about as focused as it gets when it comes to its products, services and other customer offerings, however, the fact of the matter is that the company not only goes up against Intuit, which is far more integrated into the digital realm and far more popular among younger taxpayers, by the way, but it is also does go up against free, as individuals can simply do their own taxes (even though we mentioned it can be a hassle, as previously mentioned in paragraphs above) and with the rise of artificial intelligence (AI), taxes are a space that is undoubtedly ripe for innovation and disruption in this respect, as we wouldn’t be all that surprised if ChatGPT was already capable of practically doing your taxes for you.
At this stage, given what H&R Block has(n’t) really proven to us, we view AI as more of a threat than an opportunity for the company.
With all of this in the eggshell, H&R Block is still a very large, reputable player within the tax industry and most certainly a force to be reckoned with, however, in the context of investing, we must always think about the future and use the past only as a sort of reference, not a full-blown indicator.
Let’s do some digging into this company’s recent past, shall we?
H&R Block’s stock financials
First and foremost, H&R Block is a $6.75 billion company (according to its currently prevailing market capitalization), and it also presently maintains a share price of $48.35 along with a corresponding price-to-earnings (P/E) ratio of 13.40 while also paying out an annual dividend of $1.28, all of which sets this company’s stock (NYSE: HRB) on some solid ground, especially when referencing its below fair value price-to-earnings ratio, initially indicating that H&R’s stock is trading at a discount relative to its true, intrinsic, sum-of-the-parts worth.
A consistent quarterly dividend hardly hurts as well.
In leaning more into this company and its financial picture, H&R Block’s executive team is in charge of taking care of and tending to just north of $3 billion in terms of total assets along with, oddly enough, just slightly less north of $3 billion in terms of total liabilities, which, to us, hardly indicates that this company has a lot of financial breathing room to dive deeper into employing artificial intelligence into its business operations, as remaining a competitive legacy tax service and brand will require this company to heavily embrace AI, which will inherently require hundreds of millions, if not billions of dollars in order to fully immerse its system(s) and stay relevant and more importantly, competitive with companies that have already gotten the AI memo, such as Intuit.
Candidly, this is quite worrying to us, as merely servicing its current debt levels is not an easy breezy task (although it is certainly doable over time), and thus tacking on a considerably higher amount to its already elevated total liabilities could prove to be problematic in the long run.
We just don’t like the current overall balance sheet breakdown of H&R Block.
As it relates to the company’s income statement, H&R Block’s total revenues over the last handful of years (starting in 2019) have been quite consistent overall, hanging out at around $3 billion each year, however, a notable yet somewhat expected plummet in revenues was incurred during 2020 and as reported in 2021 (due to what else but COVID-19), flopping as hard as to a comparably measly $466 million, while Intuit, for example, grew its revenues by billions of dollars during 2020 and 2021 alone.
While we enjoy the consistency, the COVID-induced drop is frightening and speaks largely to the company’s brick and mortar vulnerabilities, and because of this, we sure do hope it is one of this company’s top priorities to cut a good deal of its real estate fat and transition more of its consulting online, so as to cut out all sorts of costs and vulnerabilities to the currently softening national real estate market.
Peering over to H&R Block’s cash flow statement, the company’s net income and total cash from operations (measured between 2019 and 2023) are consistent with the aforementioned observations and statements relating to the firm’s revenues and real estate sensitivities. For example, the company’s total cash from operations have ranged from a relative low of $35 million (in 2020, of course) to a relative high of $822 million, as reported in 2023, which is evidently a fairly large delta and a positive in that its recent cash flows have been resoundingly positive, however, we want to see how it measures up against the industry’s cumulative average.
H&R Block’s stock fundamentals
Alright, we must tip our hats and give credit when credit is due, and credit is definitely in order given the company’s listed trailing twelve month (TTM) net profit margin (as it is displayed on TD Ameritrade’s platform) of 17.14% to the industry’s respective average of a far less competitive -42.21%, and given the sheer size and prowess this company has in the in-person tax assistance arena, this was to be expected to a certain degree, however, this is in fact a very large degree of variance, and a resounding positive for the company, as on the basis of competition, its TTM net profit margin is substantially larger, offering the company a good deal of leverage when it comes to pricing, and in other ways as well.
Moving right over to the company’s core TTM returns on both the bases of assets and investment(s), H&R Block’s metrics on these fronts (as also gathered from TD Ameritrade’s platform) frankly once again blow the industry’s averages out of the water, with its returns on assets and investments pegged at 22.28% and 30.07% to the industry’s respective averages of -17.91% and 3.66%.
This is yet another positive sign, as H&R Block has been able out-profit (by quite a wide margin for that matter) the competition (on average), however, margins and core return metrics hold a little less weight in terms of importance (to us, at least) when we are relatively fearful for the company’s revenues and objectively elevated debt levels.
Should you buy H&R Block stock?
There’s some good, some bad and some ugly.
The good lies within the company’s proven, stable revenues (that is, during ordinary, non-COVID-19 times) and proven business model, which can largely be attributed to the fact that many either don’t want to deal with taxes themselves or they put it off to the last minute and are typically willing to shell out a few hundred greenbacks so someone else can take care of it for them, lending itself as being a fairly recession resistant business model, at least for now.
The bad lies within the company’s overall balance sheet breakdown, particularly that it is just as total asset-heavy as it is total liability-heavy, which is somewhat inherently related to this company’s extensive real estate portfolio, which we believe is weighing down on this company far more than it is actually helping.
The ugly comes from the fact that we are far from convinced that H&R Block is indulging far enough into artificial intelligence and the applications thereof, which, while it would more than likely tack on some more debt onto this company’s books, there is a very high likelihood that it would disproportionately streamline and grow its business in the long run, especially when considering that its primary industry competitor is already apparently miles ahead of this company on the online tax service and deeper AI spectrum.
Although the company’s shares (NYSE: HRB) are trading at a relative discount to fair, intrinsic value and while there are some marked positives integrated in this company, when considering the current competitive landscape and the other aforementioned variables, we think it would be best if we offered this company’s stock a “sell” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.
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