H&R Block Moat Check

The third stock on the Magic Formula stock list on January 24th is H&R Block (HRB).  I just checked the Magic Formula website today and H&R Block is still on the list.  H&R Block is a very familiar consumer name associated with tax preparation.  However, there is more to the company than just tax preparation.

H&R Block is a diversified company with subsidiaries delivering tax, investment, mortgage and business services and products.  The company’s key products include:

  • Tax preparation in the United States, Canada, Australia, and the United Kingdom with the Peace of Mind guarantee
  • Refund anticipation loans
  • Refund Anticipation Checks
  • Easy Pay Loans
  • Express IRAs
  • Tax Return Preparation Courses
  • TaxCut tax preparation software
  • H&R Block DeductionPro
  • Kiplinger’s Home and Business Attorney
  • Kiplinger’s WILLPower
  • Online tax preparation
  • Franchises
  • Mortgage services
  • RSM McGladrey business accounting and tax services for the middle-market
  • Financial planning
  • College savings products
  • Brokerage accounts
  • Insurance annuity products

H&R Block is basically the McDonald’s of financial services. Just taking a quick glance at their offerings and associated branding, it appears that H&R Block has a moat.  Warren Buffett has even owned this stock.

Let’s take a quick look at the 5 primary factors that I use to help indicate whether a company has a wide moat.  These factors include ROIC, book value growth, earnings per share growth, sales growth, and free cash flow growth over the past five years.

According to ADVFN, H&R Block currently has a ROIC of 21.9 and a five year average of 21.7.  Looks good to me.

Book value per share has gone from from $3.20 in 2001 to $5.97 in 2005 according to the numbers on ADVFN. That’s an average growth rate of 16.9 percent over the past five years.

Over the same time period, EPS has gone from $0.76 to $1.92.  That is about a 26 percent average annual growth rate over the past 5 years.  EPS was down slightly over this past year however.

Revenues have grown at 10.5 percent over the past five years.  For the current trailing twelve months versus the previous 12 month period, revenues have grown by 26 percent.

Free cash flow has bounced around quite a bit over the past five years.  Overall, it was about a 13 percent growth rate per year in free cash flow.  However, give how free cash flow has bounced around dramatically, I wouldn’t put too much faith in this number.

There is substantial competition in each of H&R Block’s businesses.  However, H&R Block has a significant brand name and it’s massive seasonal retail network dramatically widens its moat. 

This moat has been under siege by tax preparation software products and online tax filing.  H&R Block has addressed these issues by creating their own software product and online tax services.  The main weakness that H&R Block has is that it has become reliant on taking advantage of unsavvy financial service consumers with their high cost tax refund advances and other financial products.  Their mortgage business also exposes them to the potential risk of a housing crash. 

Even given a few of these weaknesses, I believe that H&R Block still has a sustainable competitive advantage.  This Magic Formula stock looks like it might be the real deal with a wide moat and worth further investigation.

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