H&R Block Is Cheap in All the Wrong Ways

The last time I wrote about H&R Block (NYSE: HRB  ) , I was cautiously optimistic about its long-term prospects. Despite its quarterly loss, the tax services provider had some positives to offer investors. Now I am going to evaluate the stock's return-generating capacity in context with its price and compare it with its competitors.

Evaluating profitability
Return on equity is a crucial metric that evaluates how effectively a company is utilizing its finances. In this context, Block's ROE at 51.43% is much better than its rivals Intuit (Nasdaq: INTU  ) , which has an ROE of 22.65%, and Paychex (Nasdaq: PAYX  ) , with an ROE of 35.73%.

Stability and yields
Because ROE doesn't include the use of debt in its measurement of efficiency, it's important to check out the balance sheet as well as ensure that a company's capitalization is healthy. With a debt-to-equity ratio of 212.7%, Block doesn't look nearly as stable as its peer Intuit, whose ratio stands at 35.4%. In fact, this figure is dangerously high for H&R Block.

Despite this, the company has a decent current yield of 3.70% and a payout ratio of 48%, which is both healthy and attractive. It recently declared a quarterly cash dividend of $0.15 per share. This will be Block's 195th consecutive quarterly dividend, reflecting an unwavering trend of paying dividends.

Valuation
With a forward P/E of 9.5, Block is definitely cheaper than Intuit at 17.6 and Paychex at 19.6. Block's enterprise value to EBITDA or the enterprise multiple, a measure of how expensive a stock is, stands at 5.4 times. For Intuit, the ratio stands at 11.4 times while for Paychex, it is 11.8 times. Block's enterprise value/revenue, another fundamental indicator of the value of a stock, stands at 1.3 times. Intuit again looks comparatively expensive at 3.7 times.

The Foolish bottom line
Block's quarterly revenue growth on a year-on-year basis was a negative 8.90%, compared to Intuit's growth of 15%. H&R Block is cheap, but you're getting a lot of added baggage along with that value. So it's for a good reason. The balance sheet is not built to last, and recent performance hasn't been strong. Caveat emptor.

Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article. Motley Fool newsletter services have recommended buying shares of Paychex. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.


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  • Report this Comment On June 19, 2011, at 2:09 AM, jpaa74 wrote:

    Umm, both HRB's declining earnings, and INTU's growing earnings are obviously already built in to the price of both firms' stock. If either would surprise the market by reversing their earnings trend, which way do you think the price would move for the respective stock? Is contrarian investing completely dead at Fool.com? Long live EMT (apparently...)!

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