BLOCK H & R INC HRB
March 11, 2020 - 1:02am EST by
dgn02000
2020 2021
Price: 20.00 EPS 2.05 00
Shares Out. (in M): 203 P/E 10x 0
Market Cap (in $M): 4,065 P/FCF 9x 0
Net Debt (in $M): 2,500 EBIT 700 0
TEV ($): 6,565 TEV/EBIT 9.3x 0

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Description

 

Background info:

 

HRB has been written up multiple times here. It is the largest tax prep services company in the US. The business has been flat for a while, but is a solid cash flow generator. In 2019, the company did $3.1 bn in revenue with $800m of EBITDA and $511m of cash flow. At $20 per share, the company is trading at 10x EPS.

 

Management is disciplined and has been very accurate in their projections / able to hit them.

 

Revenue has been flat, but highly consistent at $3.0-3.1bn over the last 5 years.

 

Year

2019

2018

2017

2016

2015

Revenue

$3.094B

$3.160B

$3.036B

$3.038B

$3.079B

 

Modest amount of leverage, especially relative to the consistent earnings.

 

 

Thesis:

 

I expect a 25% return over the next year. 5% of that will come from the current dividend. 20% will come from price increasing to pre-COVID19 levels.

 

HRB has repurchased 13% of its float between 2017-2019 at an average price of $23. This is 15% above the current stock price.

 

The 20% price drop recently is unwarranted as it’s largely driven by general market movement. HRB’s operations will likely see little to no impact of the virus.

 

 

Downside:

 

The revenue from assisted returns accounts for 60.07% of all of H&R Block's revenue. There has been a consistent small volume decline.

 

The DIY segment is growing. The largest competitor in the DIY tax return space is TurboTax. Looking at Intuit's 2019 year-end filing we can see the difference in scale of the segments. TurboTax creates revenue of $2.775 Billion for Intuit while H&R Block's DIY segment creates revenue of $260 Million. That means TurboTax as a whole is over 10x larger than H&R Block's DIY segment. Also just to note TurboTax has seen revenue growth of 11% over the past year while H&R Block DIY has had 7%. 

 

Year

2019

2018

2017

2016

2015

Total Assisted Returns Vol.

-1.7%

-2.6%

-2.6%

-5.79%

-4.37%

Assisted Returns Revenue

-4.5%

+2.4%

+0.6%

+1.3%

+3.98%

 

 

Conclusion:

HRB might not be a stock you'd stay in for 10 years, but in the short-term, it offers a solid 25% upside. 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

General market sentiment turning with COVID19 fears subsiding. And investors appreciating more a solid dividend yield in light of recent interest rate drop.

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