H&R Block and Intuit Continue to Struggle

Includes: HRB, INTU, JHTXQ
by: Faisal Laljee

April 15th is perhaps one of the most feared deadlines that every American has to contend with every year. But there are two companies (unless you consider Uncle Sam to be a company in which case there are three) that make a living off this one deadline.

First, over 50 years ago, H&R Block (NYSE:HRB) and then more recently, Intuit (NASDAQ:INTU), decided they would make filing taxes their business. It's a great idea - every American needs to file taxes, and the tax code gets more complicated every year. But both HRB and INTU have not performed well as stocks for quite some time. Why?

Well, let's look at the easier stock first. Intuit was the first online tax preparation software and cornered the tax software market with Turbo Tax. It defied HRB's brick and mortar model and single handedly changed the landscape for tax preparation and filing.

But aside from its Turbo Tax software, which goes through minor revisions every year, what revolutionary piece of software has Intuit really come up with? Quicken? Quickbooks? Both are good software, but not exactly market makers like their tax sibling. So, INTU has to solely depend on gaining market share in a market that is already quite saturated.

Broadband internet usage in the US is close to 90% now and most US households are online. So, organic growth has slowed down considerably. Then there is the question of beating the competition - well here too, Turbo Tax has only market share to lose considering its dominance in the space for over 10 years now.

HRB is more difficult. This company made the terrible mistake some 15 years ago of not taking the internet seriously. They laughed at Turbo Tax, thinking online tax filing would never catch on. Then, when they realized that a good chunk of tax filers did ditch the Block offices for their living room and pj's, instead of buying out Turbo Tax, they purchased a second tier software called Tax Cut from Kiplinger and since then, despite trying to immitate Turbo Tax's success, Tax Cut has fallen short and failed to gain too much market share.

At the same time, Tax Cut has in some way, cannibalized Block's higher margin brick and mortar business. Moreover, it was not long before more software popped up all over the internet (TaxAct comes to mind) advertising free e-filing. Competing tax businesses like Jackson Hewitt (JTX) and Liberty Tax started also taking some (albeit not so much) market share from Block.

Once it was realized that Block would need more than just a new branding initiative to grow their business, they branched out to financial services, mortgage lending and business accounting with limited success. The financial services business never really took off and the mortgage business collapsed after initial success. So what is next in the cards for them?

Only one thing is certain - both companies need to figure out another way to grow their business. Tax filing is just not cutting it anymore and shareholders would be better off putting their tax returns to work in other stocks.

Full Disclosure: I do not own INTU or HRB but my position can change anytime without notice.