Over the past six months, H&R Block’s shares (currently trading at $49.82) have posted a disappointing 6.2% loss, well below the S&P 500’s 15.5% gain. This might have investors contemplating their next move.
Is there a buying opportunity in H&R Block, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is H&R Block Not Exciting?
Even with the cheaper entry price, we're swiping left on H&R Block for now. Here are three reasons why HRB doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, H&R Block’s sales grew at a sluggish 7.3% compounded annual growth rate over the last five years. This was below our standard for the consumer discretionary sector. We note H&R Block is a seasonal business because it generates most of its revenue during tax season, so the charts in our report will look a bit lumpy.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect H&R Block’s revenue to rise by 3.3%, close to its 7.3% annualized growth for the past five years. This projection doesn't excite us and suggests its newer products and services will not accelerate its top-line performance yet.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, H&R Block’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
H&R Block isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at $49.82 per share (or a forward price-to-sales ratio of 1.7×). The market typically values companies like H&R Block based on their anticipated profits for the next 12 months, but there aren’t enough published estimates to arrive at a reliable number. You should avoid this stock for now - better opportunities lie elsewhere. We’d recommend looking at the most dominant software business in the world.
Stocks We Would Buy Instead of H&R Block
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