Valuation: H&R Block, Inc. (HRB)

Company Review: H&R Block, Inc. (HRB)

Company Profile: H&R Block Inc. (obtained via Google Finance)

H&R Block, Inc. (H&R Block) is a financial services company with subsidiaries providing tax, investment, mortgage, and accounting and business consulting services and products. The Company’s Tax Services segment provides income tax return preparation and other services and products related to tax return preparation to the general public in the United States, Canada and Australia. H&R Block’s Business Services segment is a national accounting, tax and business consulting firm primarily serving mid-sized businesses under the RSM McGladrey name. Its Consumer Financial Services segment offers brokerage services, along with investment planning and related financial advice through H&R Block Financial Advisors and full-service banking through H&R Block Bank. The Company’s mortgage operations offer a range of home mortgage services through Option One Mortgage Corporation and H&R Block Mortgage Corporation. H&R Block serves its clients’ financial needs through the delivery of a variety of tax and financial services. On April 19, 2007, H&R Block entered into an agreement to sell Option One Mortgage Corporation (OOMC).

Business and Management Review

1) Is the business simple and understandable?

H&R Block is a firm that is divided into three business segment. The Tax Services segment which engages in providing tax return preparation and related services and products in the United States and its territories, Canada and Australia. This division’s revenues include fees earned for services performed at Company-owned retail tax offices, royalties from franchise retail tax offices, sales of Peace of Mind (POM) guarantees, sales of tax preparation and other software, fees from online tax preparation, and participation in refund anticipation loans (RALs) and Instant Money Advance Loans (IMALs). The second segment of HRB is the Business Services that offers middle-market companies accounting, tax and business consulting services, wealth management and capital markets services. Segment revenues for the Business Services constituted 23.2% of its consolidated revenues of continuing operations during fiscal year 2007 at comparison of the Tax Services division which had revenues that constituted 66.8% of its consolidated revenues of continuing operations during the fiscal year ended April 30, 2007 (fiscal 2007). Lastly, the Consumer Financial Services sector deals with the offering of brokerage services, along with investment planning and related financial advice through H&R Block Financial Advisors, Inc. (HRBFA) and full-service banking through HRB Bank. HRBFA and HRB Bank, the Company’s Block-branded businesses, are focused on retail tax client loyalty and retention by offering expanded financial services. Its revenues constituted 9.7% of its consolidated revenues of continuing operations during fiscal 2007.

2) Does the business have a consistent operating history?

This company has grown rapidly from their very beginnings. From its humble start to now been the world largest tax preparation firm with over 19 million customers worldwide, its main contribution to their success has been the development of highly innovative tax services to adjust to their customers’ needs.

3) Does the system have favorable long term prospects?

Hence this company suffered a third quarter losses due mainly to the slow start to the tax season which was delayed by the change to federal tax laws with the Alternative Minimum Tax; HRB was able to shrink their losses by not counting a $26.3 million pretax charge for costs of staff reductions and executive departures. Moreover, H&R block has not been the exception to the subprime collapse. This company saw a 3.5 percent decline in the number of clients coming to its retail tax preparation office during the third quarter, but their overall tax revenue was up 5.4 percent from a year ago thanks to higher fees. Nonetheless, the current financial market in the U.S. and the adjusted last quarter loss will not have a direct impact on this company future profitability as they highly market their products as the biggest firm in the tax personal service industry. Additionally, compared to its industry peers, this stock has been one of the worst performers over the past five years, but we have to keep in mind that the historic returns are not necessarily a predictor of future performance. Persistent strength or weakness, however, may very well say something about the structure of an industry or quality of a company’s management. Lastly over the long haul, this company has posted results that are about average for its industry, though its ROA over the most recent trailing 12 months was very low. Note that the company has had very strong profit margins, another key profitability measure.

4) Is management rationale?

Management has intended to improve the company’s financial performance by deferring liabilities that may had had worsen the current firm’s situation. This situation was mainly driven by the lost on discontinue operations which included its Option One Mortgage Corporation. Moreover, the bad loans and repurchase defaulted loans from investors, as well as impairment charges to the value of the remaining loans and other charges tied to the closing of most of Option One’s operations were factors for HBR last quarter’s loss. However, management knows that for the company to generate decent returns for investors in the future, it will probably only have to realize moderate growth in earnings or a higher valuation by the market. Overall, the management has been rationale in their decisions.

5) Is management candid with its shareholders?

H&R Block contains good amount of investor information within its website. The company keeps investors posted of any activities by including a list of events and a webcast replay system where investors can listen to important corporate news.

6) Does management resist the institutional imperative?

We believe that H&R Block management resist institutional imperative.

Financial and Value Review

Defensive

1) Size of firm

The firm does have market cap greater than two billion dollar, therefore this test fails. “Pass”.

2) Strong financial condition

HRB current ratio is lower than 2, so this test fails. “Fail”.

3) Earnings stability

The company does not have positive net income for the previews ten years, as a result this test fails. “Fail”.

4) Dividend record

HRB has paid dividends for the past 10 years. “Pass”.

5) Earnings growth

H&R Block does not have a 1/3 increase in its EPS for the past 10 years. “Fail”.

6) Price to earnings analysis

This test fails as they have a PE higher than 20. “Fail”.

7) Price to book analysis

The company posses a PB ratio higher than 2.5 and a PB*PE ratio higher than 50. Both of these tests fail. “Fail”/”Fail”.

Conclusion

With as score of 2/8 HRB does not pass the Defensive investor Test.

Enterprising:
1) Strong financial condition

HRB posses a current ratio lower than 1.5, so this test fails. However its debt to NCA is lower than 1.1, thus passing on the other test. “Fail”/”Pass”

2) Earnings stability

They don’t have positive net income for the past 5 years. “Fail”

3) Dividend record

Currently pays dividends. “Pass”.

4) Earnings growth

Does not possess earnings greater than 5 years ago. “Fail”

5) Price

This test fails as price is higher than 150% net tangible assets. “Fail”

Conclusion:

As this company only passes two of the six tests, we do not believe HRB is suitable for enterprising investors.

Valuation:

We find the Fair value of AMD to be $18.65.

Opinion:

Since the company is trading at $17.24 we believe that the stock is been undervalued by the market, but we do not find this company appropriate for neither Enterprise nor Defensive Investors.

Neither of us held a position in H&R Block Inc. at the time of publication. Also, please read our disclaimer and Our Methods.


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