H&R Block: Exceptional Potential

H&B Block (HRB) is one of the leading tax preparation companies in the U.S. On Monday May 18th, HRB reached a new 52-week low at a price of $13.73. HRB has increased its dividend every year for 11 consecutive years in row. Prior to cutting the dividend by 31% from 1995 to 1997, HRB had increased the dividend payment 13 years in a row.

According to Value Line Investment Survey (dated 5/22/2009), HRB is selling under the average price-to-cash flow of 12 times. Using the full year cash flow of $1.84 for 2007, HRB has a mean price of $22.08. At the current price, HRB is expected to increase by 35% if it were to revert to the mean.

Unless were going the way of an even "Greater" Depression, this stock has an exceptional amount of potential. HRB has rid itself of the toxic waste of subprime mortgages that it once owned. Unlike the major banks, which recently had to water down their stock, HRB has maintained the same number of share outstanding. This means that any earnings in the future will be dramatic compared to the last two years.

According to Morningstar (dated 4/24/2009), HRB faces lawsuits related to the former mortgage unit that was involved in subprime lending. Additionally, HRB has accumulated massive amounts of long-term debt as well as sub par return-on-equity and return-on-assets in 2007 and 2008.

Applying Dow Theory to HRB gives us the following upside and downside targets:

• Upside
  • $19.15
  • $24.57
  • $30
• Downside
  • $7.71

By falling to $13.73 intra-day, HRB pierced a prior technical support level ($13.90). If HRB can hold at the current levels then a 24% gain to the $19 level would be easy to accomplish. HRB seems like a great company to investigate for your next investment purchase. It is my hope that the stock price can continue to fall so that the shares can be acquired at a better price. Emphasis should be placed on the downside risk of HRB going to $7.71.

The purpose of my research recommendations is to point out quality Dividend Achievers that have reached a new 52-week low. From this point begins the research to verify the quality of the stock for both short and long-term investing. These recommendations are within the context of the second year of an 18-year bear market. A bear market that I expect to trade in a range between 16,000 and 5,000.

Disclosure: I don't not own HRB yet

Comments

[epeon:]

HRB's core business is doing tax preparation. People are moving to doing it via a computer. They are loosing core business and been doing so for years. You sure you want to invest in a company loosing its core?

May 19 06:15 AM

[Uncle Pie:]

I tried HRB's Taxcut software a couple of years back. When I tried to enter my K-1 information, a message came up saying that these tax forms are not "supported". I tried to use their software to prepare a 1041 fiduciary return. When I tried to prepare form 1116 for the foreign tax credit, I got a message saying this form is not "supported". I contacted the company and got my purchase price refunded. I don't know if they have corrected these problems in the meantime, but I was astounded that a large company like HRB, which advertises nationally, would put a product on the market that doesn't work! I've been using Turbotax ever since. This year I filed electronically for the first time. It was free and I got confirmation from the IRS in 2 days that my return had been accepted. I got my refund direct deposited to my checking account in about 10 days! I didn't have to make any trips to the photocopy shop or to the post office or the bank! Excellent!

May 19 08:59 AM

[epeon:]

Precisely my point. In the software area, HRB is not a leader. I use TAXACT rather then Turbotax, but the point is lots of people are doing this rather then go to HRB.

May 19 09:11 AM

[Alan Young:]

Thanks for pointing this out. I didn't know there were STILL falling knives in this market!

May 19 09:06 PM

[FormerHRB:]

As a former employee, I can tell you that this ship has sailed. Every article you read that talks about an upside mearly mentions shedding the toxic business, (Business that by the way doubled the profits for a number of years), but fails to mention the drop in repeat clients. If this any other retailer, the first thing you would look at is same store sales YOY and ignore entities that they no longer own. Same store sales are dismal and this year were down close to double digits. This year when they could have been the client's champian with wallets tight, they raised the average fee by nearly 9%. The 5.6% drop in clients includes a 10% increase in digital clients where the profit margin is razor thin.

Every year it is a push to pick up new clients and that is harder than ever. The clients they need to pick up are the thirty-somethings who grew up in the computer age and are very comfortable with a software solution. Good luck because they are also reluctant to pay $300.00 to have their taxes prepared by someone that they are not convinced is smarter than they are.

If you own it, hold it until Breedan sells the company and if you don't, don't.

Jun 11 04:22 PM