Thursday, July 17, 1997

Jackson Hewitt, Inc.
(Nasdaq: JTAX)
Phone: 757-473-3300
Price (7/17/97): $16 13/16


It's a taxing dilemma for Jackson Hewitt shareholders. Do they hold their shares, which have tripled so far this year, or do they cash out? If they sell, they will have hefty capital gains to report to the IRS -- and Jackson Hewitt wins there too. You see, Jackson Hewitt may end up preparing those Schedule D tax forms, profiting from the shareholder's desertion. Rising from obscurity and gross undervaluation, Jackson Hewitt was a double just waiting to happen.


Jackson Hewitt is second only to H&R BLOCK (NYSE: HRB) in electronic tax preparation. The Virginia Beach company operates and franchises 1372 tax preparation offices. In fiscal 1997, which ended fittingly in April, the company processed 875,000 tax returns.


Income Statement

      12-month sales: $31.4 million
      12-month income: $6.2 million*
      12-month EPS: $1.22*
      Profit Margin: 19.7%
      Market Cap: $77.5 million
      (*Excludes after-tax extraordinary
        charge of $1.2 million, or $0.27 per share)

      Balance Sheet*
      Cash: $0.4 million
      Current Assets: $12.7 million
      Current Liabilities: $15.5 million
      Long-term Debt: $2.8 million
      (*As of Jan. 31, 1997)

      Price-to-earnings: 13.8
      Price-to-sales: 2.5


Back in January the shares were selling for what would eventually be just three times fiscal 1997 earnings. Not that one would have known it. There were no analysts following the company, and it had earned just $0.40 a share the year before.

Like H&R Block, the company shuffles its feet three quarters of the year hoping to break even, only to report the bulk of its earnings after tax season in the April quarter. But by the time Jackson Hewitt had reported its flagship quarter's hefty profit on June 9, the stock price had already risen threefold.


Even after this stellar rise, the company is still trading for just 13.9 times trailing earnings. That is much less than the P/E multiple that H&R Block presently commands -- and that is even considering that H&R Block's shares have been weighed down by its majority stake in COMPUSERVE (Nasdaq: CSRV), the troubled online service.

While financial services companies often command lower PE multiples than the rest of the market, it is not an entirely accurate to lump Jackson Hewitt into that group. As interest rates may play a role in home buying or taking out equity loans, taxes are not cyclical. Nope. They are an annual ritual. Taxes are forever.

Of course, don't expect earnings to triple again this year. Revenues grew just 25% last year and the improving margins that accounted for the 200% climb in earnings per share are pretty well maxed out. But if margins remain steady and sales climb at a similar clip, the company could, in theory, earn a little better than $1.50 per share this fiscal year. That would find the company selling at just 11 times earnings and a bargain by any valuation method.

Then again, that was in theory. Last month the company filed to sell a million shares in a secondary offering. That will increase the shares outstanding by 22% and wipe out the bulk of that scenario's earnings gain. On the other hand, it will help clean up a highly leveraged balance sheet and pave the way for expansion. Even if the earning gains are muted by share dilution this year, it is still rare to find a growth stock selling at a low-teen earnings multiple. Almost as rare as finding an empty Jackson Hewitt office on April 15.

-Rick Aristotle Munarriz (

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