- H&R Block reported excellent results over tax season.
- Strategy to focus on profitable customers is paying off.
- Shares are fairly valued, and the dividend and rock solid balance sheet create a margin of safety.
H&R Block (NYSE:HRB) opened its books for the so important fourth quarter on Wednesday before the market open. With few businesses exhibiting such a large seasonality as H&R Block does, investors laid a close eye on the solid results.
Shares are fairly valued as the company is focused on future growth. The company trades at 15 times current earnings and operates with a rock-solid balance sheet. I am a long-term buyer on dips.
Fourth Quarter Highlights
H&R Block reported fourth-quarter revenues of $2.56 billion, up 16.5% compared to last year. Analysts were looking for revenues to rise to just $2.49 billion.
The company posted net earnings of $910.0 million, up 37.0% compared to the year before. Given the modest dilution in the shareholder base, earnings per share rose by 36.0% to $3.29 on a diluted basis. Adjusted earnings of $3.36 came in comfortably ahead of consensus estimates at $3.23 per share.
The So Important Tax Season
The solid performance is of crucial importance for H&R Block. The fourth-quarter revenues make up an astonishing 81% of total revenues for the year, making it hard to find a business out there seeing such a degree of seasonality in its business model.
The fact that the company posted such impressive results in the final quarter is a huge relief for a company which is reporting losses in each of the other three quarters of the year.
The company is clearly focusing on more profitable customers, reporting solid revenue growth on an annual basis despite serving fewer clients.
Valuing H&R Block
The company ended the tax season quarter with $2.19 billion in cash and equivalents, excluding restricted cash holdings. Total debt of $906 million still results in a comfortable net cash position of nearly $1.3 billion.
Full-year revenues came in at $3.02 billion thanks to the strong final quarter. Earnings advanced to $500 million, up from $465 million last year. At $32 per share, H&R Block's equity is currently valued around $8.8 billion which on its turn values operating assets at roughly $7.5 billion.
This values operating assets at 2.5 times annual revenues and 15 times annual earnings.
H&R Block currently pays a quarterly dividend of $0.20 per share for an annual dividend yield of 2.5%.
Growth Potential In A Fragmented Industry
At the end of last year, H&R Block held a very interesting presentation for its investors. The company is actually the largest tax preparer in the world, filing one in every six tax returns in the US.
The company employs about 80,000 tax professionals with an average tenure of 8 years who assist customers with their taxes and related financial services. Over the past year, H&R generated $3 billion in revenues, predominantly by assisting in 24.2 million tax returns which translates into an ¨ARPU¨ of $124 per filing.
The company continues to focus on taxes through its ¨plus¨ program while it sees huge opportunities thanks to changes in the healthcare system. The fragmented industry and lack of regulation for tax preparers is also providing H&R with a huge opportunity to benefit from consolidation in the coming years.
Takeaway For Investors
Filing taxes is not a preferred task of many consumers, a reason why roughly 60% of the population seeks assistance when filing taxes, a market growing at 1-2% per year.
Investors have been happy with CEO William Cobb being onboard since 2011. The cost cutting moves and strategic directions have resulted in shares doubling from $15 to levels in the low thirties at the moment. Despite the move, shares have only moved up about 30% over the past decade as the company has witnessed a steady decline in revenues, only partially offset by share repurchases.
Shareholders are betting on a rejuvenation of growth under the tenure of Cobb which is focusing on more profitable clients, while boosting prices to drive earnings. H&R Block aims to further grow in a still very fragmented market.
Cobb also sold the company's banking unit in April of this year. Of course, this increases the reliance on the volatile tax season which makes investors a bit nervous to some degree. On the other hand, shares currently trade at just 15 times earnings after backing out the net cash holdings of the firm, which is reasonable.
Double-digit revenue growth will be hard to replicate into the new year, yet the valuation is not too demanding. Shares offer a bit of value on potential pullbacks, and I would be a buyer in the $28-$30 region.