H&R Block's Taxing Future

For H&R Block (NYSE: HRB  ) , taxes aren't a pain, they're the livelihood for more than 10,000 storefronts and nearly 100,000 tax preparers. But is that going to change in coming times? The company is the world's largest provider of affordable tax and personal finance services. With the rise of nearly costless online tax services, what incentive is there for price-conscious tax filers to visit their local H&R Block? Let's take a look at recent earnings and evaluate the business to determine if this is a company headed toward trouble.

The year in review
H&R Block recently released its fiscal 2013 earnings, which showed gains across the board yet fell short of analyst expectations.

On the top line, revenue bumped up nearly a half point to $2.9 billion, mainly on higher volume of digital filings (we'll address this in a minute). Earnings per share from continuing operations increased dramatically -- up 25% to $1.59. Management credits the company's cost-cutting efforts, which accounted for $126 million in savings for the year. The company's EBITDA margins grew substantially, up 4 points to 30%.

Assisted tax filings in the United States were down 2.7%, with the average filing price up 1.7%.

Overall, the company seemed to do well in the face of sudden changes in tax law and a delay in IRS filing services.

So, given the decent performance, why the dire opening paragraph?

Sea change
As with many industries, tax prep is witnessing a period of technological disruption in the form of Web-based software. Intuit (NASDAQ: INTU  ) is the leader in the space with its Turbo Tax product. Lesser-known Blucora (NASDAQ: BCOR  ) has its hand in the game as well with TaxACT. The latter is a small but healthy business. TaxACT maintains strong margins and grows at roughly 8% to 10% annually. Currently, the company maintains around 12% of online tax-prep market share.

Turbo Tax is the gorilla in the space, with 60% of the business. For most (including myself), this is the go-to service for online tax prep. It's easy and it's relatively inexpensive. TaxACT is even more price-conscious, with filings under $10, and there is belief that as the company continues to market its product and gain stickiness among consumers, it could steal market share -- but from whom?

My guess: H&R Block's online software. The company's product is priced nearly identical to Turbo Tax's, and for the most part offers an identical experience, if slightly less polished. The company advertises that in the case of an audit, an H&R Block professional will hold your hand during the event. However, I imagine many would seek third-party assistance if truly in hot water with the IRS.

Bottom line
H&R Block was wise to jump on the online filing train, and management has proved itself capable of adapting the size of the company to address trends toward online filing. But there are two pure players in the space that offer two different products -- one premium, one entry-level -- and leave little room for H&R Block At Home to grow.

On top of that, the company trades at more than 15 times forward earnings and has an EV/EBITDA of 13.76 times. Investors are paying up for this company to continue growing substantially, even in the face of the aforementioned headwinds.

While I wouldn't recommend shorting at this time, H&R Block is by no means on my buy list.

link

Tax increases that took effect at the beginning of 2013 affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "How You Can Fight Back Against Higher Taxes," the Motley Fool's tax experts run through what to watch out for in doing your tax planning this year. With its concrete advice on how to cut taxes for decades to come, you won't want to miss out. Click here to get your copy today -- it's absolutely free.


Read/Post Comments (0) | Recommend This Article (1)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2488405, ~/Articles/ArticleHandler.aspx, 12/21/2014 4:05:04 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement