Around the Block with H&R Block
Talk about tarnishing an American brand. H&R Block (HRB) has had its share of legal issues over the last few years. Lets review:
In 2001, it was sued for charging high rates on its “Refund Anticipation Loan” program. H&R Block charges a fee for this loan and some entities got upset because they considered this fee to be an interest on the loan – a ridiculously high interest.
In 2006, it was learnt that H&R Block miscalculated its own corporate state taxes.
Later in 2006 (today), the New York attorney general decided to press charges against H&R Block for allegedly misleading people into opening Express IRAs.
In addition to these legal woes, Warren Buffet, who had owned a good chunk of H&R Block shares for a while, started reducing his position in the company in 2004. In 2005, H&R Block’s mortgage division performed miserably and since inception, H&R Block Financial Advisors have yet to be profitable.
Here is the real kicker – this stock is at the same level as it was back in Jan 2002 (or a little before that). Talk about a dead beat. So what went wrong with this growth story that it has underperformed the broader markets for 3 straight years?
Lets start with the advent of the internet. For the longest time, the company executives denied that the internet was a threat. They refused to believe that people are smart enough to do their own taxes and sooner or later, there is going to be a shift in the way middle-America conducts their financial transactions. Even when the company bought TaxCut, they treated it like a step child, spending all their marketing efforts to drive in physical traffic to their tax offices. When things slowed down, they opened more branches.
A few years back, H&R Block opened a financial arm for individual investors. H&R Block Financial Advisors would assist tax customers with their retirement planning and investments. However, HRBFA was never able to compete with the likes of TD Waterhouse and Charles Schwab.
A little before that, H&R Block Mortgage opened its doors for business, to primarily help tax customers who needed to refinance or buy homes. But companies like Ameriquest and Countrywide were going mass media with their campaigns and dwarfed HRBMC.
None of these moves make sense to me. H&R Block’s core tax customer is not exactly your latte drinking, 6 figure earning Investment Banker. Their typical customer is a renter, with an average household income far less than average. The wealthier population either do their taxes online or through an accountant. I doubt if the wealthier part of our population wants to share his financial records with a part-time, commission-based tax professional, who knows nothing about taxes other than what he learnt 6 weeks ago from a tax course he took.
Enough about the company. So what about the stock? Is it a buy? Well – no. I think there is some short-term upside to the stock. Maybe a 10% move. But its not worth taking the risk. I believe the stock will remain under pressure until:
- H&R Block’s legal worries are behind it
- TaxCut takes market share from TurboTax and brick and mortar business
- Competition in Liberty Tax and Jackson-Hewitt subsides due to a push online where these players have no presence
- H&R Block Financial Advisors turns it around by offering competitive pricing, a better online brokerage website and moves away from its focus on the low income earning brick and mortar customers to TaxCut customers
- H&R Block uses its newly acquired bank license to consolidate its branches for HRBFA and HRBMC
- H&R Block buys a real estate business to help its mortgage arm drive in home buyers
Too big of a laundry list if you ask me. Pass on this one.
Faisal Laljee
H&R Block is still offering RAL’s underwritten by HSBC, and they’re still being targeted, because plain and simple, RAL”s are a rip-off. The AG in California is rightfully taking them on over this issue.
So would you recommend shorting the stock or are you just saying we should not buy it?
Don’t Buy. I would have shorted in the mid-twenties and covered here, however, I believe $20 is a long term support level for the stock and I don’t advise shorting now. Additionally, a lot of the negativity that I mentioned is already baked into this price and the stock will probably flatline at these levels.