It's commonly stated that the only two certainties in life are death and taxes. Since we all must inevitably merge with the infinite, Tuesday's Foolish headlines included a number of insightful estate planning tips and overview of related trusts. It's good to know the basics, but if you're like most people, you'd prefer to pay an outside party to work through the details. The same can be said of those dreaded annual tax filings, which brings us to the very profitable tax preparing business that has a number of other appealing investment characteristics and only a few key players. One such player is Jackson Hewitt (NYSE:JTX), which was spun off from Cendant (NYSE:CD) in June 2004. The shares have had a nice run, having nearly doubled from $17 to a current $30.80, but now they're about 10% off their recent highs. Here's why the stock may be worth a look.
My Foolish colleague Rich Smith recently looked into Jackson Hewitt's buyback program, and he also commented on the company's recent earnings. For a quick recap to get you up to speed, earnings were released on June 1 (since Hewitt's fiscal year ends April 30, or directly after tax season). Total revenue jumped 18% to $275 million, while diluted earnings grew just over 20% for the year. The company also announced a share buyback, upped its dividend by 50%, and reported that total tax returns prepared jumped 10%. On another positive note, margins continue to increase, as detailed by Rich in his pre-earnings Foolish Forecast.
It's also useful to compare Hewitt to archrival H&R Block (NYSE:HRB). Fools may wonder why Hewitt is so upbeat and posting solid results in its tax-preparing business, while H&R posted a much less sanguine outlook and significantly lower 2.1% growth in tax returns prepared. One main difference may be the law of large numbers, as H&R served nearly 20 million clients while Hewitt prepared just under 4 million tax returns, or a market share of 20% and 4%, respectively. That implies a total market of 100 million clients. Hewitt's total revenue is about 11% of H&R Block's, while Hewitt is about one-eighth the size of H&R, based on market capitalization. Other than that, H&R Block has a number of company-specific issues to work through that are currently holding it back. A wounded H&R Block only favors Hewitt, as does its smaller size and consequent ability to more easily gain market share.
Industry demographics are compelling. Jackson Hewitt's most recent 10-K shows that 60% of tax returns in 2004 were prepared by a third party. Penetration rates could grow further, since one of life's other certainties is that taxes get more complicated with each passing year. Plus, Jackson Hewitt has a sizeable financial services business that it can cross-sell to its tax customers. The only knock I have against the company is that it has a limited history as a publicly traded entity since being spun off from Cendant. Other than that, like H&R Block, it throws off solid amounts of free cash flow with low levels of capital expenditure and has a subsequent double digit return on capital.
Hewitt trades at a forward P/E multiple 13.3, while H&R is trading at 11.1 times next year's expected earnings. Overall, you don't have to pay that much more for a company with a more favorable growth outlook. The one thing H&R has going for it is a strong historical track record, so establishing a position in each (for exposure to both a growth and a value play) might be a good move.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss the company further.
