What a fantastic six months it’s been for H&R Block. Shares of the company have skyrocketed 47.2%, hitting $46.68. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in H&R Block, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think H&R Block Will Underperform?
We’re happy investors have made money, but we’re passing on H&R Block for now. Here are three reasons why there are better opportunities than HRB, plus one 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 put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, H&R Block grew its sales at a weak 1.9% compounded annual growth rate. This fell short of our benchmarks. 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. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
H&R Block’s EPS grew at 4.6% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 1.9% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Unfortunately, H&R Block’s ROIC has decreased 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
We see the value of companies helping consumers, but in the case of H&R Block, we’re out. After the recent surge, the stock trades at 7.8× forward P/E (or $46.68 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. We’d suggest looking at a top digital advertising platform riding the creator economy.
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