H&R Block: One Tax Story You Just Might Like

A compelling valuation with a big upside.

May 20, 2014 at 7:00AM

H&R Block (NYSE:HRB) was founded in 1955 as a brick and mortar tax preparation company. After expanding into a large number of other financial services, in recent years H&R Block has started to rationalize its portfolio of services, focusing primarily on tax preparation. H&R Block has 12,000 offices worldwide with the majority, over 10,000, located in the United States. In 2013 the company prepared over 24 million tax returns through its owned, franchise and digital solutions. While late to the digital opportunity, after ceding share to its competitor Intuit for a number of years, in recent years H&R Block has invested heavily in its digital presence and grown its market share (though still severely lagging Intuit Turbo Tax). 

As part of its portfolio rationalization H&R Block announced on April 10th the sale of H&R bank (chartered in 2006 to provide additional financial services) to BOFI. The original idea of H&R Bank was to leverage the relationship that the company had with customers through its tax business to offer additional financial services. Unfortunately this less successful than planned and ultimately led to the sale of the bank in order for the company to focus on its core tax preparation business. 

The divestiture is significant because it allows the company to pursue a more aggressive capital allocation policy. Banks are regulated by the government and must meet certain capital and funding metrics. H&R Block stand-alone would not be constrained by these regulations. Post-closing the deal H&R Block will most likely recapitalize its balance sheet to > 3x EBITDA / net debt and announce a large buyback. Over the next 3 years H&R Block will be able to buy back over 30% of its shares outstanding with existing free cash flow (excluding dividends) and excess cash (post recapitalization). 

Assisted Tax Preparation ... still a growth opportunity
Today H&R Block has the largest share of the assisted tax preparation (non-DIY) market in the United States, holding close to 20% market share. This market has been relatively slow growth from 79M in 2010 to 80M in 2013. However, the recent enactment of Obamacare will significantly increase tax complexity for not only the 45M uninsured, but those who could potentially garner savings through the Advance Tax Credit. H&R Block has already created a service directly targeting this segment known as H&R Block Tax and Health Review (http://www.hrblock.com/health care/tax-health-care-review.html). The assisted tax preparation market should see a reacceleration of growth to a conservative 5%+ CAGR over the next few years. 

Another potential upside in 2015 is congress and Obama passing legislation to regulate tax preparers. The IRS has recently been fighting with the federal courts to allow them to regulate what they believe is a large number of unscrupulous tax preparers. With the added complexity of Obamacare it is likely that Congress and Obama will push to enact legislation allowing the IRS this power. This would significantly open up H&R Block's opportunity to capture the more than 50%+ share of the 80M assisted tax preparation category that is done by independent tax preparers. 

H&R Block is currently trading at 12x FY2016 (year ending April, so a closer approximation of calendar 2015) sell-side expectations. Including share buybacks, the introduction of Obamacare, share gains within the assisted tax preparation market, and operating leverage, H&R Block could do over $3.25 of EPS in FY2016. Applying a current market multiple to the stock would yield a $39 price. This is on top of the 3% dividend yield (or $0.80 per year) that a shareholder of the stock would receive. Altogether H&R Block offers an investor over 50% upside with more if it is rewarded with multiple expansion due to a reacceleration of growth in the market.

This article originally appeared on Value Penguin.

Warren Buffett just bought nearly 9 million shares of this company
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

Value Penguin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers