This Stock Can Provide Stability to Your Portfolio

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Recently gaining employment, I had to file my tax return for the first time. When I looked up tax consultancies in Pune (India) one name that struck me was H&R Block (NYSE: HRB). I had no knowledge that the world’s largest tax services provider has held its foothold in India too as a part of its international expansion plans. My search ended there and I have successfully filed my return with the minimum possible tax liability. I wondered how good a stock will H&R Block will be for my investment plans.

Second Quarter Results

H&R Block reported revenue of $137.3 million, up by 6% over the previous-year quarter's $129.2 million and also beating the analyst’s estimate of $130.5 million. Revenue growth was driven by strong performance in Australia. EPS came in at - $0.37 beating the estimates compiled by S&P Capital IQ averaged -$0.40. The company posted a loss of $105.2 million, a growth of 28% over the previous year. It is to be noted that the second quarter is generally a quiet one for the company due to seasonality of the industry and accounts for only 5% of annual revenues. The gross margin for the quarter was 38.4%, 1,670 basis points better than the previous year quarter. The operating margin was -103.2%, 5,540 basis points better than the previous year quarter. The results were well received by the market. Shares gained more than 3% during the results week. 

Trend, Estimates & Comparison

Estimated revenues stand at $3 billion with earnings of around $400 million for the current fiscal year. Shares of the company have risen some 16.5% year to date. The company has been paying dividends for the last 200 consecutive quarters. The next dividend of $0.20 per share has also been declared to be paid in January 2013. Since 2005, the dividend has been growing at an annual rate of 8% and last year the hike in dividend was 33%. The current yield of the company stands at 4.3%, way higher than its competitor Intuit (NASDAQ: INTU) whose current yield stands at 1.14%.

The US tax code is complicated. The fiscal cliff discussions might be helpful as well as most commentators do not expect the tax code to get simplified. Moreover, the Affordable Care Act will boost revenues in the coming years as the increased complexity will drive business. The changes in the tax code are really beneficial to firms like H&R Block and Intuit (INTU). Although both of these companies benefit from such changes, they are not exactly in similar business lines. Intuit specializes in products related to financial matters targeting individuals and small businesses. Their well-known products include QuickenQuickBooks, and TurboTax. H&R Block, on the other hand, is primarily a tax preparation company also engaged in certain allied banking services such as savings account, advances & prepaid card.

The earnings of H&R Block are highly seasonal in nature. It posts operating profit only in the April ending quarter. It is looking for alternate sources of revenue to create some stability. In its recent filing of Form-10Q with SEC it quoted “we are exploring alternatives to continue delivering financial products and services to our customers.” When it comes to financial services, apart from Intuit, the other major player in the market is Sage Group (NASDAQOTH: SGPYY). The firm is a leading supplier of business management software globally. Its products include financial software enabling better cash flow management, CRM software helping to build profitable customer relationships and HR and Payroll offerings being used to improve employee performance and ensure legislative compliance.

Final Analysis

In long-term, the prospects for H&R Block look very good. The company has been shedding non-core assets such as its sale of RSM McGladrey and discontinuation of EXPRESSTAX. The tax preparation market is very much fragmented with independents and CPA's having a total 70% market share. Despite the abundant online tax preparation tools, 90% of tax files still occur with assistance.

The tax return preparation industry is growing at a stable rate of 1% - 2%. Where the industry P/E is 18.5, HRB with a P/E of 14.5 looks underpriced.With such a stock in my portfolio I don't expect spectacular capital gains, but I know my portfolio is certainly stable.

nileshmundhra has no positions in the stocks mentioned above. The Motley Fool owns shares of Intuit. Motley Fool newsletter services recommend Intuit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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