2023-10-10 12:03:20 ET
Summary
- H&R Block gets a Buy Rating today, in line with consensus from analysts and Wall Street.
- Strengths include its dividend yield, valuation, YoY earnings, and liquidity.
- Offsetting factors could be an expensive current share price and underperformance vs. the S&P500 index.
- The downside risk of a high debt load has been addressed, as well as the company's foray into non-tax prep financial services.
Analysis Summary
Today I'll be covering H&R Block (HRB) , in the consumer discretionary sector, subsector of specialized consumer services. Throughout the article, I will refer to it as HRBlock, for simplicity.
According to its Seeking Alpha profile , it trades on the NYSE, is based in Kansas City, and provides assisted income tax return preparation and do-it-yourself tax return preparation services and products to the general public primarily in the United States, Canada, and Australia.
One of its listed peers is ADT (ADT), another major player in this space.
My personal experience with the HRBlock brand has been trying their online self-guided tax filing solution many times in the past, which offers some items free and some add-ons for an extra fee. I recognized the business value of this years ago as a cloud-driven software as a service/SaaS since there was nothing really to download, and tax returns could be submitted electronically to the US IRS within minutes. However, I admit I have never actually walked into one of their retail branches, nor had a need to, though they are a common sight in strip malls across cities in the US, their bright green logo seen from afar.
With that said, today I will take the angle of an investor and analyst, rather than as a customer.
In today's article, I gave this stock a buy rating, due to having more strengths in my review than offsetting factors. In fact, I found it had 5 strengths vs. just 2 offsetting factors.
Its strengths include a 3% dividend yield, undervaluation vs its sector, revenue YoY stability, net income YoY growth, and capital and liquidity strength of the company.
Its offsetting factors include an expensive share price and underperformance vs the S&P500 index.
A downside risk to my bullish outlook is the debt load of this company, which I discuss towards the end of the article.
Methodology
My updated rating methodology as of October 2023 is to analyze the stock holistically across the following 7 categories of equal weight, and if it has more strengths than offsetting factors it gets a buy rating, otherwise will get a hold or sell rating:
dividends, valuation, revenue growth, net income and EPS, capital and liquidity, share price vs moving average, performance vs S&P 500.
All data sources come from publicly available info such as the most recent quarterly report ( FY2023 Q4 ) and company presentations, Seeking Alpha data, and media reports.
The next anticipated quarterly earnings release is expected on Nov. 1st (Fiscal year 2024, Q1). This firm's fiscal 2023 ended on June 30th.
Dividends
Here I discuss the dividend yield , 10-year dividend growth, and dividend stability over the last few years. As a dividend-focused analyst and investor, I believe these are vital metrics to look at.
Though not all investors are dividend-oriented, including many of my readers, I do think generally speaking it can be a way to generate cashflow while holding equity longer-term.
First, let's look at the dividend yield , which is 3.13% as of the writing of this article, along with a dividend payout of $0.32 per share, on a quarterly basis.
Whether or not I think it is a good yield depends on how it compares to the industry it is in, and not to other industries.
In comparison to its sector average, this yield is 19.4% above the average. I consider this a positive point as I am looking for a yield between 2.5% and 5% when considering the sector/industry, so this stock has a yield that is in line with my goal.
I consider yield important because it tells me a story: how much of a return I am getting on the capital invested, in terms of dividend income. A sudden drop in share price, as you may know, can result in a higher yield if the dividend amount remains the same.
HRBlock - dividend yield vs sector (Seeking Alpha)
Next, I am looking at the 10-year dividend growth rate, shown in the chart below, which shows steady growth . I think that is a positive point, and I always look for a good dividend growth story to tell, backed by the data. The story here is one of stable and moderate growth over many years, and a firm committed to return capital to shareholders.
Though this does not guarantee future dividends, it paints a picture to me of a 10 year history of growth.
Finally, I want to see dividend payout stability, especially if you are relying on the steady quarterly cashflow.
In looking at the table below, you can see stable payouts over the last few years, with 2 dividend increases in this time period. A cashflow scenario: if I was holding 1,000 shares, for example, I could realize $320 in quarterly cashflow from the dividends on this stock. (1,000 shares x $0.32 per share).
Based on the evidence, I consider the category of dividends a strength for this stock, on the basis of steady dividend payouts, dividend growth, and yield above average.
Valuation
To simplify analyzing the valuation , I have chosen a single metric to focus on, and that is the price-to-earnings ratio (P/E) , both the trailing and forward P/E, as it tells me what the market is pricing this stock at in relation to its earnings.
My portfolio goal is to find a valuation lower than or close to the sector average, but not too much higher. Sometimes a stock is undervalued but otherwise has strong fundamentals, so that is a company I want to uncover.
HRBlock - PE ratio (Seeking Alpha)
In the case of this stock, the trailing P/E is 11.48, which is 23.5% below the sector average, and the forward P/E of 10.61 is 27.1% below the sector average.
Hence, I would consider this stock undervalued compared to its industry, both on a trailing and forward basis.
If you compare its valuation to that of its peer, ADT , that firm's forward P/E is almost 343% higher than the sector, so it is a much higher valuation than HRBlock. In terms of valuation, of the two peers, I would pick HRBlock in my portfolio.
As far as what could be driving the low valuation for this stock, usually, the market may be lukewarm about its future earnings potential if it is not willing to pay a high price vs earnings. However, even priced at 10x earnings it is still a pretty confident sentiment, I think. Above that and I think it is stretching it a bit too much.
Based on the data, I think this valuation metric is a strength for this stock.
Revenue Growth
One topic many analysts and investors look at is top-line revenue growth, as a metric tracking revenue generated before expenses, to put it simply.
Manageable growth is important, in my opinion, because companies have competition and are striving to capture market share in their sector.
For this company, we can see from the most recent quarterly results that it achieved a YoY slight decrease in total revenue, which is so small that I would not consider it a negative point, especially since the firm seemed to recover nicely from its December 2022 figures. In addition, the gross profit had a slight YoY increase, which ought to be mentioned too and this appears due to the lower cost of revenues in Q2.
The company's revenue outlook for fiscal 2024 seems to be positive as well:
Having been a user of their platform, and knowing the tax season, it is evident from their income statement that their peak revenue periods are the quarters ending in March. For the January through March business cycle that is also when a large number of tax returns are filed before the mid-April deadline in the US.
Just food for thought as someone considering this stock for my portfolio, I also recognize the seasonality of this business model and its seasonal tax cycles, even though tax filing is not the only solution this company offers. Now it is their essential core business I would say and what they are known for as a brand, both online and via their chain of retail offices nationwide that can be spotted often in cities.
Overall, I think the data shows that top-line revenue YoY growth is a strength for this stock's rating.
Net Income and EPS
Net income and earnings per share are getting their own section here to make the analysis easier to understand and to separate these results from top-line revenue.
Based on the most recent quarterly results available, this firm achieved a YoY growth in net income and the basic earnings per share also increased on a YoY basis. This is another positive point I can call out.
Looking forward, what I think could continue to drive earnings for this company is its digital presence more so than its network of retail branches, and the following data backs that up.
As you can see, their online segment had a 1.7% YoY growth in returns prepared, whereas the other segments showed a YoY decrease.
HRBlock - YoY growth in tax returns filed (company quarterly presentation)
The value I see in this business is definitely the ability to prepare, review, and submit your taxes online all through one platform of theirs, and I think investors are seeing the value in this solution too.
I think, therefore, that this category of net income and EPS is a strength for this stock's rating, as it shows demonstrated profitability .
Capital and Liquidity
Here we'll focus on one or more items related to capital and liquidity strength of this stock's parent company.
The following is relevant data from the company's quarterly presentation. What it tells me is the company has continually had the capacity to return capital to shareholders through share repurchases, which has increased, to dividend payouts, as well as a dividend increase. These in my opinion are signs of capital strength.
HRBlock - capital allocation (company quarterly presentation)
Further, here is additional data of interest from their last quarterly presentation , which speaks to the free cash flow situation in FY2023, a positive one. If you read my recent articles, you know my style is to look for companies with positive free cash flow when possible.
HRBlock - free cash flow fy2023 (company quarterly presentation)
One thing I have been keeping track of lately during this high interest-rate environment, and therefore the higher cost of debt, is the growth in a company's long-term debt. As you can see in the table below, this firm has not increased its long-term debt all that much on a YoY basis, comparing the same two quarters:
This firm's management of debt effectively is evident in the decreased interest expense they reported in their last quarterly income statement .
Lastly, from their balance sheet we also can see YoY improvement to its cash position, another thing I consider a plus:
Based on the evidence found, I consider this firm's capital and liquidity situation a strength to its overall rating.
Share Price vs Moving Average
Now we've come to the part where I like to talk about the share price and whether I think it's a buying opportunity right now or not.
First, let's take a look at the share price and 200-day moving average as of the writing of this article:
The share price of $42.47 is 19% above the 200-day SMA which stands at $35.68 . I think this moving average is a good long-term trend indicator which is why I track it, to avoid trying to "time" short term daily price movements, although that is also a trading style for some investors.
In my portfolio goal, I am looking for crossover opportunities, where the price crosses below the moving average after a period of bullishness, which I consider a buy signal as long as other fundamentals are strong. However, a buy opportunity could also exist if the price is hovering around the moving average, and sometimes if it is above it too.
This chart shows a crossover below the moving average already occurred back in early spring, then sometime this summer went into bullish overdrive it seems.
To test the current share price against my portfolio goals I created the following simulated trade scenario: I will buy 100 shares at the current price, hold 1 year, and want to achieve at least a 10% or better (unrealized) capital gain at that time.
In anticipation of losses as well, my maximum loss tolerance is -20% (unrealized capital loss). Here is how my investing idea turned out:
The above trading idea simulation shows two scenarios, one where the future share price rises +15% above the current 200-day SMA, and the other where it drops -15% below the SMA.
The outcome of both scenarios is that they are not in line with my goals for gains and losses. For instance, the first scenario actually is a projected loss of -3.39%, and the second scenario is an even bigger projected loss of -28.5%.
Now, you may ask why would I limit the future projected share price to an arbitrary percent +/- above or below the moving average. That is a great question! The answer is that it is simply testing a risk tolerance "range" and the moving average is a nice long-term benchmark to test against. The actual future share price is impossible to predict with 100% accuracy, I think.
Based on this simulation, I think the current share price is an offsetting factor, as it appears too expensive to buy at this time, in my opinion.
Though your portfolio strategy may differ, consider this section a general and simplified framework with which to think about this stock in a longer-term sense, in which time one can expect potential gains as well as losses, so establishing a maximum risk tolerance is important.
Performance vs S&P 500
The following is a comparison of the 1-year price performance of this stock vs the S&P 500 index. I have included this metric in my updated rating methodology so as to compare this equity to a major market index that is tracked often, and whether it was able to outperform it or not.
I consider this relevant because it shows the market momentum for this stock. It may be a great company fundamentally, but the market reality is that other investors influence the share price based on demand for the stock, so comparing it to this major index could add some clues as to market sentiment.
The data shows the stock underperforming vs this index, which I consider an offsetting factor to my rating, as I believe it to indicate a lukewarm market sentiment for this stock for an extended time period. As you can see from the earlier income statement as well, this company had net losses back to back in late 2022.
Risk to my Outlook
A downside risk to my bullish outlook would be something I touched on earlier, which is this company's debt load which has crept up somewhat in FY2023, to the tune of $1.488B in long-term debt vs $1.486B the prior fiscal year.
Not a huge jump, as mentioned earlier, but still could be of concern to bearish-minded investors and analysts in the current high interest rate environment where any newly issued debt is so much more expensive. This can affect the income statement potentially.
HRblock long term debt FY23 vs FY22 (company earnings release)
However, I think that one countering effect to interest expense is interest income , and some of my readers may not be aware that HRBlock has expanded beyond just tax prep to now offering loans as well, via their Emerald Advance program. In fact, in the quarter ending Jun. 30th, the firm earned $16.4MM in financial services revenue not related to tax preparation, as seen below:
In closing, my bullish sentiment on this stock remains and my buy rating stands. This firm is an interesting combination of financial services and technology since it is so cloud-driven and has such a major digital presence, yet at the same time maintains a national network of retail offices which I think helps with brand penetration at the least.
And as it turns out, my rating today essentially agrees with the consensus from analysts and Wall Street, but coming in slightly less bullish than the quant system this time:
HRblock - rating consensus (Seeking Alpha)
For further details see:
H&R Block A Buy Opportunity, And Today More Than Just Tax Prep