Is H&R Block the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if H&R Block (NYSE: HRB  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at H&R Block.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% (0.5%) Fail
  1-Year Revenue Growth > 12% (4.7%) Fail
Margins Gross Margin > 35% 39.6% Pass
  Net Margin > 15% 13% Fail
Balance Sheet Debt to Equity < 50% 131.7% Fail
  Current Ratio > 1.3 0.91 Fail
Opportunities Return on Equity > 15% 52.4% Pass
Valuation Normalized P/E < 20 8.13 Pass
Dividends Current Yield > 2% 4.5% Pass
  5-Year Dividend Growth > 10% 5.7% Fail
       
  Total Score   4 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

H&R Block weighs in with 4 points, falling well short of perfect. The tax specialist is entering the strong part of its year, but its financial metrics don't show the strength that investors would want from a perfect stock.

H&R Block is still struggling to recover from some mistakes it has made. Its ill-timed foray into the mortgage lending market turned out badly, and the company still faces profit pressures from the resulting collateral damage of the housing bust. And now, the company won't be able to offer its lucrative refund anticipation loans, due to exclusive partner HSBC (NYSE: HBC  ) being barred by federal regulators from making such loan. It even got fined by the Financial Industry Regulatory Authority for insufficiently supervising some of its financial representatives.

Meanwhile, primary competitor Intuit (Nasdaq: INTU  ) continues to see strength from its TurboTax software. Intuit has gradually taken market share away from live providers like H&R Block and Jackson Hewitt.

So far, H&R Block has been able to maintain a strong dividend, and at a low valuation, the shares may look attractive to value investors. Its low payout ratio suggests that the company could maintain its dividend for some time even with no profit growth.

To become a perfect stock, though, H&R Block needs to reverse its past mistakes and start moving forward. As customers get more comfortable with tax software, the provider of live services faces an uphill battle on that front.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add H&R Block to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 14, 2011, at 12:16 PM, JoeSixTax wrote:

    "H&R Block is still struggling to recover from some mistakes it has made. Its ill-timed foray into the mortgage lending market turned out badly, and the company still faces profit pressures from the resulting collateral damage of the housing bust"

    Why does this explanation keep getting recycled? HRB's issues have to do with the lack of success with the tax business. Mortgage issues were a 2008 issue. Now, they serve as a reason for shorts to exert downward pressure on the stock and for management to use as an excuse to avoid discussing the declining tax business.

  • Report this Comment On February 14, 2011, at 2:33 PM, schn1eck7 wrote:

    @ JoeSixTax

    The reason this is continually "recycled" is because mortgages are on the balance sheet long-term and can still cause damage. It will chew up some of the owner earnings the next few years; therefore, it should be regarded similarly to debt.

    The tax business is really declining; it's pretty stable. In fact, they are charging more the last few years, per person, than they were 5 years ago. H&R Block looks solid today, the valuation was too rich for me however. I'm seeing better opportunities elsewhere.

  • Report this Comment On February 14, 2011, at 3:17 PM, DRK2 wrote:

    Pretty much everything in this article is old news, and hardly insightful regarding the direction of this stock.

    Jackson Hewitt is aggressively advertising that H & R Block refunds take 8-15 days while theirs are available in 1-2 days as they still have Refund Anticipation Loans - Never mind their outrageous cost.

    The real issue is how much tax return revenue H & R Block will lose as a result of Jackson Hewitt’s competitive advantage.

  • Report this Comment On February 16, 2011, at 11:03 AM, joemom1 wrote:

    As long as H&R Block continues prey on poor ignorent people I think their stock will prosper. It should hit the $20.00 mark.

  • Report this Comment On February 17, 2011, at 1:07 AM, FoolishSlacker wrote:

    What about H&R Block's acquisition of Tax Act software (by way of acquiring its privately held publishers, 2nd Story Software)?

    That was in October, 2010.

    I've used TaxAct. It's a well done piece of software that's very competitive with Intuit's better-known TurboTax online tax preparation software.

    I haven't seen any new marketing thrown behind the TaxAct brand. What's HRB planning to do with their new acquisition? How much new revenue can we expect it to generate?

  • Report this Comment On February 25, 2011, at 3:25 PM, azmfool wrote:

    What used to get me to buy the HR Block Tax Cut software was the tie-in with MS Money. Buy one, get the other free, or substantially discounted. That relationship no longer exists (and if I may add, MS Money Sunset stinks!). Compare that to the bundle of TurboTax and Quicken offered by Intuit. I'm no genius, but if I were responsible for the brand I'd give some serious thought to obtaining the rights to Money, or offering something comaprable.

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