Description

Background info:

HRB has been written up multiple times here. It is the largest tax prep services company in the US. The business has been flat for a while, but is a solid cash flow generator. In 2019, the company did $3.1 bn in revenue with $800m of EBITDA and $511m of cash flow. At $20 per share, the company is trading at 10x EPS.

Management is disciplined and has been very accurate in their projections / able to hit them.

Revenue has been flat, but highly consistent at $3.0-3.1bn over the last 5 years.

Modest amount of leverage, especially relative to the consistent earnings.

Thesis:

I expect a 25% return over the next year. 5% of that will come from the current dividend. 20% will come from price increasing to pre-COVID19 levels.

HRB has repurchased 13% of its float between 2017-2019 at an average price of $23. This is 15% above the current stock price.

The 20% price drop recently is unwarranted as it’s largely driven by general market movement. HRB’s operations will likely see little to no impact of the virus.

Downside:

The revenue from assisted returns accounts for 60.07% of all of H&R Block's revenue. There has been a consistent small volume decline.

The DIY segment is growing. The largest competitor in the DIY tax return space is TurboTax. Looking at Intuit's 2019 year-end filing we can see the difference in scale of the segments. TurboTax creates revenue of $2.775 Billion for Intuit while H&R Block's DIY segment creates revenue of $260 Million. That means TurboTax as a whole is over 10x larger than H&R Block's DIY segment. Also just to note TurboTax has seen revenue growth of 11% over the past year while H&R Block DIY has had 7%. 

Conclusion:

HRB might not be a stock you'd stay in for 10 years, but in the short-term, it offers a solid 25% upside. 

Catalyst

General market sentiment turning with COVID19 fears subsiding. And investors appreciating more a solid dividend yield in light of recent interest rate drop.