H&R Block: Excellent Long-Term Value Play, Benefiting From Fiscal Cliff

| About: H&R Block (HRB)

Shares of H&R Block (HRB) gained more than 3% over the past trading week. The provider of tax preparation and banking services reported its second quarter results on Thursday before the market open. The results were well-received by the market.

Second Quarter Results

H&R Block reported second quarter revenues of $137.3 million for its fiscal 2013, up 6% on the year. Revenue growth was driven by strong performance in Australia. Revenues comfortably beat analysts consensus of $130.5 million. Note that the second quarter is traditionally a very quiet one for H&R Block, making up just 5% of annual revenues.

The company reported a net loss of $101 million, compared to a loss of $123 million last year. Net losses came in at $0.37 per diluted share, after the company retired almost 10% of its shares outstanding over the past year. Analysts expected H&R Block to lose $0.40 per diluted share.

Thanks to restructuring efforts, H&R Block remains on pace to deliver $85-$100 million in pre-tax cost savings for the fiscal year of 2013. CEO Bill Cob commented on the results

I'm very pleased with the improvement in our second quarter results, which reflect savings from our cost reduction initiatives and a strong tax season in Australia. The US tax season is right around the corner and we believe we're on pace to deliver significant earnings and margin expansion in fiscal 2013.


H&R Block ended its second quarter with $1.30 billion in cash, restricted cash and equivalents. The company operates with $1.51 billion in short- and long-term debt, for a net debt position of roughly $200 million.

For the first six months of its fiscal 2013, H&R Block generated revenues of $233.8 million. Net losses, due to the seasonality of the business came in at $212.7 million for the period. Typically the company generates roughly 70% of its total revenues in the "tax" quarter, ending on April 30.

The company is on track to generate revenues of $3 billion. The company could earn around $400 million for the year.

The market currently values the company at $5.0 billion. This values the firm at 1.7 times annual revenues and roughly 12-13 times annual earnings, based on my estimates above.

H&R Block currently pays a quarterly dividend of $0.20 per diluted share for an annual dividend yield of 4.3%.

Some Historical Perspective

Year to date, shares of H&R Block have risen some 16%. Shares started the year around $16 in January and rose to $17 during spring. Shares fell back to $15 after a the company took measures to improve performance, after a slightly disappointing important "tax" quarter. Shares continued to recover, currently exchanging hands at the highest levels of this year around $18.50 per share.

Over a longer time period, shares of H&R Block have fallen from highs of $25 in 2008 to lows of $10 in 2010. Revenues and earnings have been under pressure in recent years, as online tax tools started to take business away from H&R Block. The company retired roughly a fifth of its shares outstanding over the past 5 years, thereby maintaining earnings per share.

Investment Thesis

H&R Blocks looks with confidence into the future. The Affordable Care Act will boost revenues in the coming years as the increased complexity will drive business. The tax returns which H&R Block helps to prepare include much of the information needed under the act. The fiscal cliff discussions might be helpful as well as most commentators do not expect the tax code to get simplified. The changes in the tax code are really beneficial to firms like H&R Block and Intuit (INTU).

The company furthermore focuses on creating business with its customers around the year, not just in the quarter ending April. The company hopes to reduce the seasonality of the business, and expand into foreign markets. The company continues to aim for $100 million of pre-tax cost savings for the fiscal 2012. In October, the company announced that it might drop its designation as a Savings & Loan company due to increased regulation and compliance costs.

The company will furthermore focus on long-term expansion plans in India and Brazil. Last year, the company only generated $233 million in international revenues, less than 10% of total revenues.

Long-term, the prospects for H&R Block look very good. The tax preparation market is very much fragmented with independents and CPA's having a total 70% market share. Despite the abundant online tax preparation tools, 90% of tax files still occur with assistance.

I think shares offer outstanding long-term potential, given the strong value that shares represent. Value multiples are fair, while shareholders receive strong returns in the form of a decent dividend yield and continued share repurchases. Don't expect spectacular capital gains, but the dividend yield is very decent.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.