H&R Block: A Misunderstood Oligopoly In Tax Preparation

Jan. 23, 2019 12:09 AM ETH&R Block, Inc. (HRB)INTU, THO3 Comments
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  • H&R Block has a strong position in the do-it-yourself tax preparation oligopoly, the potential of which is often misunderstood by investors.
  • Companies in an oligopoly can achieve higher levels of profitability and return on assets and ultimately provide investors with market beating stock appreciation.
  • Online do-it-yourself tax preparation is not rapidly destroying the assisted category, steady industry growth or H&R Block’s market position.
  • Investors need to balance the strong quality of H&R Block and its valuation with the underlying uncertainty of its industry, but should also factor in the likely benefits of an oligopoly in part of its market.

It’s the middle of tax season, and despite a government shutdown, people will need to file their taxes. So we thought it was a good time to write an article about H&R Block (NYSE:HRB). This article focuses on the shift of tax preparation to digital do-it-yourself (DIY) solutions and what we believe is a misconception some people have about the impacts that shift will have on H&R Block longer-term, specifically related to the dynamics of oligopolies. We will also address some related misperceptions related to digital disruption in the tax business and overall industry growth.

The company that founded the US tax industry

H&R Block is one of the world’s largest tax service providers, having prepared more than 720 million tax returns since 1955. There are approximately 12,000 company-owned and franchise retail locations in all 50 states, Puerto Rico and other U.S. territories, and on U.S. military bases around the world. An H&R Block branded retail office is located within five miles of most Americans. The Company provides assisted income tax return preparation, digital DIY tax solutions and other services and products related to income tax return preparation.

In fiscal 2018, H&R Block had revenues of $3.2 billion and prepared over 20 million tax returns worldwide.

US tax preparation is a fragmented mess, but DIY is on the way

The US tax preparation industry has long been a fragmented market with thousands of participants ranging from giants like H&R Block to individual CPAs or even just a family friend. It is also a big industry representing a $20 billion opportunity for the thousands of businesses and hundreds of thousands of employees trying to get in on the action. Historically, industry fragmentation was quite extreme resulting in an ultra-competitive landscape with no one company able to achieve a commanding share. The industry was based on offline, assisted

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We are a Swiss-based family office focused on managing our own capital, as well as helping other families and individuals meet their financial goals.Our principal goal is the long-term preservation and appreciation of capital in real terms. We are active across asset classes, including private and public equities, fixed income securities, real estate, precious metals, as well as alternative investments. Our background and specialization is in global equities. Our investment process focuses on owning competitively-advantaged companies at reasonable prices.We also like to engage with the Seeking Alpha community to hear other viewpoints and share our opinions.www.oyat.com

Disclosure: I am/we are long HRB, THO. 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.

Additional disclosure: The information enclosed in this article is deemed to be accurate and reliable, but is not guaranteed to or by the author. This article does not constitute investment advice.

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