Profit From Something You Hate

With gas prices rising, recent strength in discretionary consumer spending is at risk. It might be a good time to think about what consumers just can't go without.

Filing tax forms, for example. Investors can benefit from this despised annual ritual two ways: companies that provide tax preparation services and companies that provide tax preparation software. According to the National Retail Federation's 2011 Tax Returns Consumer Intentions and Actions survey, both sectors should enjoy higher demand this year (see table).

Source: National Retail Federation's 2011 Tax Returns Consumer Intentions and Actions Survey.

H&R Block (NYSE: HRB) offers both tax software and tax preparation services. The stock took a beating last year because the firm won't be able to offer profitable refund-anticipation loans this year. But in early March, H&R Block reported better than expected earnings for the January quarter and said tax return preparation was up 6% compared to last year through February, with online filings especially strong. Notably, management said tax season got off to a slow start and then improved in February. That suggests the current quarter could see higher growth than last quarter.

H&R Block is likely benefiting from the travails of competitor Jackson Hewitt Tax Services. RALs are Jackson's most profitable product, but the company has also been under pressure from the government to clamp down on the product. The firm has also been losing clients to "do it yourself" offerings. In early March, the company reported earnings that fell short of the consensus estimate and canceled its scheduled earnings call "in light of ongoing discussions between Jackson Hewitt and lenders." Management is working on a restructuring plan that may involve bankruptcy. Enough said.

Intuit's (Nasdaq: INTU) TurboTax software is well-known and has helped the company take market share from traditional tax preparers such as H&R Block and Jackson over the years. Intuit has consistently grown revenue and EPS, even during the Great Recession. That said, the aforementioned survey indicates tax software will see only about half as much growth this year as tax preparation services.

Foolish takeaway
Intuit appears poised to grow again this tax season, although a survey suggests H&R Block could take greater share. That said, Intuit's EPS is forecast to grow this year while H&R Block's is forecast to decline modestly. Either stock could be a good bet, with H&B Block's forward P/E of 10 times and 3.7% dividend yield appealing to value investors and Intuit's forward P/E ratio of 17 times suitable for growth investors.

More on H&R Block:

• Beyond "The Little Book That Beats the Market"
• The Simple Way to Find Market-Beating Stocks
• 7 Reasons to Worry About Next Week