H&R Block Looks Fairly Valued, But It Comes With Sizable Downside Risk

Shares of tax preparation company H&R Block (NYSE:HRB) have been under pressure since mid-2017 in anticipation of a simpler tax return process as a part of the U.S. tax shake-up proposed by the Trump administration. While the company’s shares have largely remained around the $25 mark since then, it recovered to around $27 over recent weeks. We estimate that the company’s stock is worth $27 on a fundamental basis. However, potential industry headwinds could drag the price estimate much lower to $19 in a downside scenario – representing downside of around 30%.

We arrive at these price estimates using our interactive model for H&R Block, which is based on 5 core value drivers for the company:

• Total Tax Returns Filed In The U.S., which represents the total market size and is the number of income tax returns that are filed with the IRS each year.
• H&R Block’s Market Share, which represents the company’s share of all tax returns filed in the U.S.

• Ratio of International to U.S. Returns Filed by H&R Block, which allows us to estimate the number of tax returns the company files outside the U.S.

• Net Income per Return Filed, which represents the net income generated by the company for each tax return it files.

• Price-to-Earnings multiple, which we estimate to be 12.5

The estimated market value of $5.8 billion represents a share price of ~$27.50.

Downside Scenario Shows Risks

Our downside scenario uses more pessimistic estimates for these five inputs, and results in substantial downside to our price estimate. This scenario assumes that the total number of tax returns filed in the U.S. remains at 152 million, as assumed under the base case, but we assume that more people file taxes online and the number of people needing assistance shrinks considerably. In this scenario, H&R Block’s market share falls to 12.5% (instead of 12.8% under the base case) as fewer people are assumed to require tax filing assistance. Further, the ratio of international to U.S. returns filed is assumed to remain level at 18% (instead of increasing to 19% under the base case).

For our downside scenario, we assume that net Income per tax returned filed falls to $16.50 (from $20 under the base case). This would make sense considering the fact that a smaller number of people using H&R Block’s services to file paper returns would mean lower overall fees per return filed, as the company makes the most money per return from these tax returns. Also, a larger proportion of the people using H&R Block’s service to file taxes online will be able to do so for free. It should be noted that the net income per tax return filed was $16.20 in fiscal 2016, so the $16.50 figure is certainly plausible.

Additionally, the price-earnings multiple is 11.5 in the downside case (instead of 12.5 in the base case). The lower multiple figure would make sense given the fact that a simpler tax filing process reduces the demand for H&R Block’s service – reducing the size of its total addressable market and its growth potential. Further, H&R Block trails Intuit’s TurboTax by a considerable margin when it comes to online tax filing services.

Note: H&R Block reports its results over a 12-month period ending April 30 of each year. The historical figures and estimates above correspond to company-reported fiscal periods.

Don’t Agree With Our Forecast? Feel Free To Create Your Own By Making Changes To Our Model

What’s behind Trefis? See How it’s Powering New Collaboration and What-Ifs
For CFOs and Finance Teams | Product, R&D, and Marketing Teams
More Trefis Research
Like our charts? Explore example interactive dashboards and create your own