2-Star Stocks Poised to Plunge: H&R Block?

By Brian D. Pacampara | More Articles
September 7, 2011 | Comments (3)

Based on the aggregated intelligence of 180,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, tax prep specialist H&R Block (NYSE: HRB ) has received a distressing two-star ranking.

With that in mind, let's take a closer look at H&R Block's business and see what CAPS investors are saying about the stock right now.

H&R Block facts

Headquarters (Founded)	Kansas City, Mo. (1946)
Market Cap	$4.12 billion
Industry	Specialized consumer services
Trailing-12-Month Revenue	$3.63 billion
Management	CEO William Cobb (since May 2011) CFO Jeff Brown (since September 2010)
Return on Equity (Average, Past 3 Years)	42.6%
Cash/Debt	$1.01 billion / $1.08 billion
Dividend Yield	4.4%
Competitors	Intuit (Nasdaq: INTU )

Sources: Capital IQ (a division of Standard & Poor's) and Motley Fool CAPS.

On CAPS, 31% of the 565 members who have rated H&R Block believe the stock will underperform the S&P 500 going forward. These bears include hymettus and All-Star TSIF, who is ranked in the top 1% of our community.

Earlier this summer, hymettus touched on the do-it-yourself tax prep trend working against H&R Block:

This company cannot compete with the cheap online alternatives. Jackson Hewitt went down first. Next victim ... [Liberty Tax Service] ... but then HRB! I recommend shorting HRB and buying lots and lots of T-bills.

Over the past three years, in fact, H&R Block's top line has declined at a rate of 3% annually. Meanwhile, industry peers like Intuit, Paychex (Nasdaq: PAYX ) , and Iron Mountain (NYSE: IRM ) have grown their revenues at a rate of 8.8%, 0.3%, and 2.7%, respectively.

CAPS All-Star TSIF elaborates on the H&R Block bear case:

I thought rival Jackson Hewitt going bankrupt might help them, but the fact remains that customers of walk-in services for taxes continue and will continue to decline as online, free, and computer software programs continue to grow. Should the government (not likely in the short run) ever simplify the tax system then business will bottom hard for H&R Block. Possible changes to deductions may change the long form/short form mix as well. ...

H&R Block, from a "short perspective" may have some divisional sells or small acquisitions to shake the stock and rattle the shorts from time to time, but I can't see much upward momentum as far as the eye can see.

What do you think about H&R Block, or any other stock for that matter? If you want to retire rich, you need to protect your portfolio from any undue risk. Staying away from dangerous stocks is crucial to securing your financial future, and on Motley Fool CAPS, thousands of investors are working every day to flag them. CAPS is 100% free, so get started!

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Fool contributor Brian Pacampara owns no position in any of the companies mentioned. 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 Fool's disclosure policy always gets a perfect score.

Read/Post Comments (3) | 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 icon found on every comment.

Report this Comment On September 07, 2011, at 5:39 PM, hschacht wrote:

Paychex and Iron Mountain are "industry peers"? Really? One could argue that it was partially HRB that put Jackson Hewitt out of business. The balance sheet at HRB also looks quite healthy. $500 million mortgage portfolio that is gradually liquidating also, not to mention (but I will) the recent RSM McGladrey for $600+ million. Oh, and then there is that free cash flow and mgt's intelligent allocation of it. So I'm sorry if I don't see a clear bearish case here, especially at a market value of $4 billion. And this article doesn't make the case with such bogus comparisons.
Lastly, there is competition in this industry... mostly from software and accounting firms... but the fact that HRB's revenue has been pressured does not mean that the company is going bankrupt. Talk about a leap.
Report this Comment On September 07, 2011, at 5:57 PM, TSIF wrote:

Where did you see anyone in this article say anything about Bankrupt??? Talk about reading what you want into something and taking a leap!
HRB didn't put Jackson out of business..there wasn't enough business for either of them.
HRB took a beating on selling RSM McGladrey including a necessary writeoff. That was quite the bargain. Talk about effective management.
Anyone who thinks HBR has possitive cash flow on a yoy basis needs to review reading statements.
Finally, this forum is to "predict" how an equity will do against the S&P. At 3x book and no catalyst and for the reasons in the article, while it isn't a Bankruptcy candidate, it certainly appears to be dead money.
Good luck.
Report this Comment On September 07, 2011, at 6:02 PM, TSIF wrote:

RE: $500 Million mortgage portfolio.
Impaired loans are listed in the July 31, 2011 10Q filed with the SEC as $266,627,000.
Very impressive portfolio.

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