HRB Building Blocks

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While it looks like stocks have gotten some sort of bounce here, it’s still way too early to be celebrating. 

After all, major corporations like Apple, Goldman Sachs, and Microsoft have all announced that they’ll be making cuts to their staff or limiting hiring shortly as they try to navigate this new economic environment and prepare for a possible recession. 

Of course, there is still uncertainty regarding the Fed, Russia, and corporate earnings. 

But regardless of whether the economy tanks, or recovers from here, there is one certainty. 

Folks in America will have to pay their taxes. And that’s why companies like H&R Block (HRB) are seen as safe bets in this environment. 

Despite the recent surge in interest for Xpresspa Group (XSPA), H&R Block garnered more searches from financial pros than any other personal services stock.

Crazy as it sounds, shares of this tax company are up 50% year-to-date.

But can it keep up this record run?

Find out our analysis below… 

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Berkshire Hathaway’s Business

H&R Block (HRB) offers income tax preparation, assistance, and DIY tax solutions to individuals. In addition, it offers bookkeeping and payroll services to small businesses. 

HRB also has a financial services division and offers a prepaid debit MasterCard, a mobile banking platform, and lines of credit. 

The company generates the majority of its revenues from assisted tax preparation followed by DIY tax prep and U.S. royalties.  

While H&R Block’s brick-and-mortar locations span the country, the company has made moves in the digital space. Spruce, the company’s new banking platform, had 150K signups during Q3 2022 and more than $60M in customer deposits.

This is part of the company’s 5-year strategy known as Block Horizons.

Its Wave accounting software is a one-stop management tool for small business owners. It saw an increase of 25% in revenue growth in Q3 2022. 

While these segments still represent a fraction of the total revenues, they are the fastest growing.

Financials

Shares of the company continue to climb as HRB hits near record revenues.

While gross margins declined during 2020 and the pandemic, they’ve since recovered and expanded as digital becomes a larger part of the business.

This is also reflected in the expanded operating income margins.

HRB has total debt of $2.3 billion, $1.04 billion in cash and a market cap of $5.9 billion. 

The firm has a current ratio of 1.10x. This demonstrates to investors it has enough liquidity to handle its short-term liabilities.  

Furthermore, HRB pays its investors an annual dividend of $1.08 per share. 

But that’s not the only way it’s been able to reward shareholders. In Q3 2022, it repurchased approximately 10m shares. And since 2016, it has returned over $2.6 billion to shareholders. 

What we love here is the huge amount of free cash flow available at the end of each year. That’s helped propel shares as revenue gains plus shareholder friendly activities equals happy investors.

Valuation

HRB carries a P/E ratio of 14.97x, which is significantly better than ADP 31.61x, and INTU 44.30x. However, its forward Non-GAAP P/E ratio sits at just 10.87x, below the sector average. 

And while those companies have much larger market caps than HRB, it doesn’t discount that HRB has a price-to-sales ratio of 2.39x, while ADP is at 5.59x, and INTU is at 8.88x.

There are over 9,000 H&R Block locations in America. And has a gross profit margin (TTM) of 47.2%, which is better than its 5-year average of 43.85%.  

The company’s EBIT margin of 25.0% is significantly better than its 5-year average of 20.9%. And its EBITDA margin of 30.2% is better than ADP 26.2%, and INTU 19.4%

Furthermore, HRB has an operating margin (ttm) of 25.07%. And generates $80.7 million in cash from operations. 

Our Opinion – 7/10

Regardless if the economy returns from here or falls into a recession. There’s one thing for sure if you work in America, you must file your taxes. And because of that, HRB will always have a consistent flow of business, while it works on expanding other aspects of its business like Wave, and Spruce. 

Despite shares up over 50% YTD, we still think it’s cheap. And we believe it will continue to thrive in this market environment for the next 12-24 months.