H&R Aims to Get Out of the Blocks
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The nation’s largest tax preparer, H&R Block (NYSE: HRB) posted lukewarm fourth quarter results this week. The company managed to just about satisfy the Street’s expectations on the top line but failed on the bottom line.
Despite being the largest player in the tax preparation market, H&R Block has seen its market share erode in the past due to stiff competition from Intuit (NASDAQ: INTU). As a result, it has been making certain changes, both in its management and business, so as to maintain its hegemony in the market. H&R Block’s moves have been well-received by investors, as the stock gained almost 4% even though it posted mixed numbers in the quarter.
H&R Block’s global return preparation jumped 4.3% from last year to a record 25.6 million clients. The number of clients in the U.S. increased 4%, or 900,000 from last year. Of these additions, 150,000 were in the assisted category while the remaining 750,000 were in the digital category, a spike of 11%.
The growth in digital is a very important pointer towards HBR's future. The company has struggled to keep up with arch-rival Intuit’s TurboTax, which is a do-it-yourself software and enables clients to file their taxes themselves. Intuit currently commands 60% of the online tax preparation volumes and H&R Block is trying its best to cut its teeth in this segment. Hence, the company's growth in this vital market points towards a better performance ahead.
H&R Block has been making steady progress in digital over the last two years, outperforming its rivals in this space. The company looks to sustain the momentum that it has and improve its standing in the market further. Moreover, the growth in digital will probably help the company in keeping its revenue stream intact as it might face stiff competition in its prepaid Emerald Card business.
Although H&R Block's issuance of Emerald Cards jumped 24% in the quarter, the advent of other players such as Regions Financial (NYSE: RF), which launched a prepaid card linked saving account earlier this month, does not bode well for the company. The latest addition by Regions to its suite of services enables it to go one up on H&R Block in the market and as such, the growth in the tax preparers digital business will hopefully stand it in good stead till it finds an answer to the Regions challenge.
In addition, HBR has been active on a number of other fronts. It has pumped up its marketing initiatives and is looking to get more clients on-board along with retaining the existing ones. The company’s Emerald Cards and Free Refund Anticipation Checks have helped it gain customers, although at the cost of losing some revenue. But these measures have been undertaken with an eye on future gains, and so a short term hit shouldn’t be much of a concern.
The company is aggressively pursuing a cost-cutting program by slashing the workforce, shutting offices and shedding non-core businesses. It expects these measures to yield $85 million to $100 million in savings annually beginning this year. H&R Block expects that these moves will help it expand its margins and also improve earnings power.
Also, H&R Block is spreading its wings quite impressively in the international market. Its international revenue grew 13% from last year and has consistently displayed such growth over the last five years on an annualized basis. The company believes that the international market has a lot of potential left to be unlocked, especially in markets such as India, Canada and Australia.
The company has started to turn its attention towards the Indian market, which might prove to be a masterstroke in the future. India is a burgeoning market for tax preparers given its large population and ever growing army of taxpayers. However, the market is scattered and HBR might turn out to be a hit in India, as it provides a number of services under one roof. Moreover, H&R Block’s online filing software would probably help it further in establishing a strong footing in the country.
H&R Block might not have had a stellar quarter behind it but it looks quite capable of doing well in the long run. It is aggressively acquiring clients, cutting costs, repurchasing shares, expanding abroad and gaining market share, all of which are tools for delivering value to shareholders.
The stock might have been a dog so far this year, under-performing its rival Intuit. But the positive reaction from investors after earnings suggests that they have faith in HBR's abilities. Similarly, analysts expect that the company's earnings will improve substantially in the future, as indicated by a forward P/E multiple of 8.95 as against the trailing P/E of 17.57. Keeping all these factors in mind, it would be prudent to keep an eye on H&R Block and you can do the same by adding it to your Watchlist by clicking here.
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