H&R Block's Taxing Future

For H&R Block , taxes aren't a pain, they're the livelihood for more than 10,000 storefronts and nearly 100,000 tax preparers. But is that going to change in coming times? The company is the world's largest provider of affordable tax and personal finance services. With the rise of nearly costless online tax services, what incentive is there for price-conscious tax filers to visit their local H&R Block? Let's take a look at recent earnings and evaluate the business to determine if this is a company headed toward trouble.

The year in review
H&R Block recently released its fiscal 2013 earnings, which showed gains across the board yet fell short of analyst expectations.

On the top line, revenue bumped up nearly a half point to $2.9 billion, mainly on higher volume of digital filings (we'll address this in a minute). Earnings per share from continuing operations increased dramatically -- up 25% to $1.59. Management credits the company's cost-cutting efforts, which accounted for $126 million in savings for the year. The company's EBITDA margins grew substantially, up 4 points to 30%.


Assisted tax filings in the United States were down 2.7%, with the average filing price up 1.7%.

Overall, the company seemed to do well in the face of sudden changes in tax law and a delay in IRS filing services.

So, given the decent performance, why the dire opening paragraph?

Sea change
As with many industries, tax prep is witnessing a period of technological disruption in the form of Web-based software. Intuit is the leader in the space with its Turbo Tax product. Lesser-known Blucora has its hand in the game as well with TaxACT. The latter is a small but healthy business. TaxACT maintains strong margins and grows at roughly 8% to 10% annually. Currently, the company maintains around 12% of online tax-prep market share.

Turbo Tax is the gorilla in the space, with 60% of the business. For most (including myself), this is the go-to service for online tax prep. It's easy and it's relatively inexpensive. TaxACT is even more price-conscious, with filings under $10, and there is belief that as the company continues to market its product and gain stickiness among consumers, it could steal market share -- but from whom?

My guess: H&R Block's online software. The company's product is priced nearly identical to Turbo Tax's, and for the most part offers an identical experience, if slightly less polished. The company advertises that in the case of an audit, an H&R Block professional will hold your hand during the event. However, I imagine many would seek third-party assistance if truly in hot water with the IRS.

Bottom line
H&R Block was wise to jump on the online filing train, and management has proved itself capable of adapting the size of the company to address trends toward online filing. But there are two pure players in the space that offer two different products -- one premium, one entry-level -- and leave little room for H&R Block At Home to grow.

On top of that, the company trades at more than 15 times forward earnings and has an EV/EBITDA of 13.76 times. Investors are paying up for this company to continue growing substantially, even in the face of the aforementioned headwinds.

While I wouldn't recommend shorting at this time, H&R Block is by no means on my buy list.

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The article H&R Block's Taxing Future originally appeared on Fool.com.

Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends Intuit. The Motley Fool owns shares of Intuit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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