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H&R Block: Why I Am Passing On The 7% Yield

Published Tue, 15 Sep 2020 09:49:33 -0400 on Seeking Alpha

Seeking AlphaEarnings Analysis | ServicesH&R Block: Why I Am Passing On The 7% YieldSep. 15, 2020 9:49 AM ET|| About: H&R Block, Inc. (HRB)by: Opal Investment ResearchOpal Investment Research Long Only, Value, Growth At Reasonable Price, ContrarianSummaryH&R Block beats on the bottom line in FQ1, but assisted volume declines are a concern.
Amid a structural shift toward digital DIY, margins look set to contract from both volume declines and pricing pressure.
The c. 7% yield is appealing at first glance, but considering the challenging backdrop, I remain cautious on the name.
As H&R Block's (HRB) recent quarter showed, the secular shift from assisted to digital DIY tax prep has further accelerated following the COVID-19 pandemic, creating a very challenging backdrop for the company going forward. Current trends point toward assisted volumes at HRB continuing to decline in the 2021 tax season as the ongoing shift to digital DIY and competition from independents drive share losses. All in all, the stock needs a re-acceleration in assisted volumes to work, but I just don't see that happening anytime soon. Instead, I see structural margin pressure ahead, and therefore, remain cautious despite the c.7% yield.
A Closer Look at the FQ1 Numbers
For the latest quarter, HRB's top line rose c. 300% Y/Y, on the back of strong tax return volumes through May, June, and July. Encouragingly, Wave Financial also saw a recovery despite the pressure on small businesses from COVID-19 throughout the quarter, with revenue rising c. 10% Q/Q (c. 233% Y/Y). The cost performance was also strong despite operating expenses rising 29.7% Y/Y, as cost increases were largely variable (taxable compensation and credit card transaction fees). As a result, HRB reported an EPS beat at $0.55 (well above consensus of $0.34).

Source: H&R Block Presentation (Q1 2021)
The key to the quarter was the cost performance, which performed better than expected, especially... Read more