Financial Services Stocks

H&R Block Inc Valuation – January 2019 $HRB

Company Profile (excerpt from Reuters): H&R Block, Inc. (H&R Block), incorporated on July 27, 1955, through its subsidiaries, provides tax preparation and other services. The Company provides assisted income tax return preparation, digital do-it-yourself (DIY) tax solutions and other services and products related to income tax return preparation to the general public primarily in the United States, Canada, Australia and their respective territories. Assisted income tax return preparation and related services are provided by tax professionals through a system of retail offices operated directly by the Company or its franchisees. It offers tax support, planning, and business accounting and advisory services to its clients. The Company offers a range of online tax services, including preparation of federal and state income tax returns, review of tax returns by a tax professional, access to tax tips, advice and tax-related news, use of calculators for tax planning, error checking and electronic filing.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of HRB – January 2019

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $5,230,687,756 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.04 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 80.99% Pass
6. Moderate PEmg Ratio PEmg < 20 12.39 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 -166.97 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.04 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 3.28 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $2.05
MG Growth Estimate 4.87%
MG Value $37.46
Opinion Undervalued
MG Grade B+
MG Value based on 3% Growth $29.78
MG Value based on 0% Growth $17.46
Market Implied Growth Rate 1.95%
Current Price $25.45
% of Intrinsic Value 67.94%

H & R Block Inc qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the high PB ratio. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $1.55 in 2015 to an estimated $2.05 for 2019. This level of demonstrated earnings growth outpaces the market’s implied estimate of 1.95% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into H & R Block Inc revealed the company was trading above its Graham Number of $8.61. The company pays a dividend of $0.96 per share, for a yield of 3.8%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 12.39, which was below the industry average of 18, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-6.68.

H & R Block Inc performs fairly well in the ModernGraham grading system, scoring a B+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$6.68
Graham Number $8.61
PEmg 12.39
Current Ratio 2.04
PB Ratio -166.97
Current Dividend $0.96
Dividend Yield 3.77%
Number of Consecutive Years of Dividend Growth 2

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Most Recent Balance Sheet Figures

Balance Sheet Information 10/1/2018
Total Current Assets $891,002,000
Total Current Liabilities $435,721,000
Long-Term Debt $1,491,328,000
Total Assets $2,233,296,000
Intangible Assets $871,715,000
Total Liabilities $2,264,621,000
Shares Outstanding (Diluted Average) 205,520,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $1.75
Apr2018 $2.91
Apr2017 $1.91
Apr2016 $1.49
Apr2015 $1.71
Apr2014 $1.72
Apr2013 $1.58
Apr2012 $0.89
Apr2011 $1.31
Apr2010 $1.43
Apr2009 $1.45
Apr2008 -$0.95
Apr2007 -$1.34
Apr2006 $1.47
Apr2005 $1.85
Apr2004 $1.92
Apr2003 $1.30
Apr2002 $1.17
Apr2001 $0.77
Apr2000 $0.64
Apr1999 $0.54

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.05
Apr2018 $2.12
Apr2017 $1.71
Apr2016 $1.57
Apr2015 $1.55
Apr2014 $1.44
Apr2013 $1.31
Apr2012 $1.06
Apr2011 $0.89
Apr2010 $0.59
Apr2009 $0.28
Apr2008 -$0.01
Apr2007 $0.66
Apr2006 $1.62
Apr2005 $1.60
Apr2004 $1.37
Apr2003 $1.02

Recommended Reading:

Other ModernGraham posts about the company

10 Best Dividend Paying Stocks for the Enterprising Investor – September 2018
5 Undervalued Companies for Value Investors with a Low Beta – May 2018
10 Best Dividend Paying Stocks for the Enterprising Investor – May 2018
H&R Block Inc Valuation – March 2018 $HRB
H&R Block Inc Valuation – June 2016 $HRB

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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