H&R Block Earnings Highlight Turnaround Potential

H&R-Block-logoTax preparation services company H&R Block (NYSE: HRB) posted mixed earnings results for its most recent fiscal quarter after the closing bell Monday. The stock rose nearly 5% in early trading Tuesday – making it the best-performing stock in the S&P 500 index at the time – although it gave back a considerable amount of the gains by the end of the day.
On the plus side, H&R Block’s revenue increased 1.8% to $3.1 billion. This was the third year in a row of revenue growth. The company’s turnaround has gone very smoothly, after a prolonged period of various challenges.
The Great Recession took a big bite out of H&R Block’s revenue and earnings. As unemployment rose, fewer people needed H&R Block’s services. Then, even after emerging from the recession, the company struggled as individuals opted to do their taxes on their own with services like Intuit’s (NASDAQ: INTU) TurboTax.

Tailwinds for Turnaround

Over the last few years, people have begun to realize that doing taxes on their own is a difficult, time-consuming task, which can often result in errors. This has helped propel H&R Block’s turnaround.
Moreover, H&R Block invested in its own do-it-yourself business, and has seen strong results there. H&R Block’s DIY returns, including desktop and online, grew volumes by 8% last year and revenue by 12%.
H&R Block prepared 24.2 million tax returns worldwide last year. Total filings increased approximately 1%. The implementation of the Affordable Care Act was a tailwind for H&R Block, as many individuals needed more help with their returns as a result. In fact, 16% of H&R Block’s customers were affected by the health-care law, which was a higher number than the company initially anticipated.
One negative aspect of H&R Block’s performance last year was that net profit declined 2.6% year over year. H&R Block earnings per share fell to $1.75, from $1.81 the year before. The key reasons were the decline of returns containing the Earned Income Tax Credit, as well as the company discontinuing its free federal 1040EZ promotion.

Cheap Stock, Solid Yield

From an investment standpoint, H&R Block stock looks like an interesting candidate for both value and income investors.
The stock is cheap, trading at just 13 times trailing 12-month earnings. This is a significant discount to the S&P 500 index, where the average stock trades for about 18 times trailing earnings.
H&R Block pays a solid 2.5% dividend yield, which is again better than the market as a whole. The company has a long track record of consistently making its dividend payments. It has paid 211 consecutive quarterly dividends, dating all the way back to when the company first went public in 1962.
H&R Block stock hasn’t had a great start to 2015. The stock price is down 5% year-to-date, which reflects its mixed results from last fiscal year. But shares rose strongly on earnings, which implies investor sentiment may be improving.
Going forward, investors may be pleased with H&R Block. The stock trades at an attractive valuation and offers a strong dividend. These are valuable margins of safety that should provide investors decent returns, if the company can continue to grow revenue for a fourth year in a row.

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