It's tax time once again.
For a still-rising number of taxpayers, this means it's time to
buy, download or purchase a copy of TurboTax or H&R Block at
Home (formerly known as TaxCut), the leading tax-preparation
H&R Block (NYSE:
These software programs are remarkably similar to each other, and
this year's programs look and feel a lot like the offerings from
last year. Frankly, it's hard to make a case for one tax software
package over the other as they are both quite good.
Yet there is a much more pitched battle when it comes to their
stocks. Each company sports a distinct
and each generates very different
. Which stock is the better buy? Let's find out...
1. Intuit: boringly successful
This maker of Quicken
software, along with the top-selling TurboTax, is the equivalent of
a Japanese sedan. It never surprises you and delivers the same user
experience year after year. With the exception of fiscal (July)
2009, when the weak
led to just 4% sales growth, revenue has otherwise risen either 11%
or 12% in three of the past four years. The outlook for fiscal 2012
and 2013? More of the same.
The rest of the company's
is equally predictable. Intuit has generated 30-32%
margins for seven straight years. The
net profit margin
appears stuck right at the 16% mark, year after year.
You get the point, the company is pretty predictable.
The question is, are
of Intuit a bargain? The best metric for these tried-and-true money
makers is a
ratio (which is the price-to-earnings ratio divided by the
growth rate). Companies with great brands such as
American Express (NYSE:
-- and Intuit -- typically merit a PEG ratio of between 1.5 and
In this respect, shares of Intuit look like a sure bargain. For
example, Coca-Cola is expected to boost earnings per share 7% in
2012, and trades for about 17 times projected 2012
of $4.14. That's a PEG ratio slightly above 2.0 (17 / 7 = 2.4). In
contrast, with projected
growth of around 14% in fiscal (July) 2013, and a price-to-earnings
(P/E) ratio of around 16.5 times projected EPS of around $3.30,
Intuit's PEG ratio is just above 1.0 (16.5 / 14 = 1.17).
2. H&R Block: A messy story gets cleaner
Despite Intuit's ability to pass the PEG test, I think H&R
Block carries even more upside -- albeit with more risk. The risk
stems from the fact H&R Block is still dealing with some
nagging lawsuits related to the recent
crisis. And the company has few fans on Wall Street, because its
annual results have been extremely erratic, since H&R Block
ventured into niches beyond its core tax business, such as mortgage
Moreover, H&R Block looks like a company in decline. Sales
peaked at $4.1 billion in fiscal (April) 2008, and are expected to
keep falling to below $3.5 billion by fiscal 2013. But you can't
forget that looks can be deceiving. Those revenue drops are the
result of management's decision to take the company back to its
roots and shed all noncore business lines. For example, the company
sold consulting firm RSM McGladrey this past August for $610
million. The tax business generates 25% pre-tax margins. McGladrey
had 6% pre-tax margins. So that $3.5 billion revenue base
represents far healthier margins and predictability than the prior
$4 billion revenue base represented.
About a year ago, I discussed H&R Block's anemic sales growth,
but also found the shares to be compelling based on the company's
free cash flow
. Shares have risen more than 30% since then, and I think an
additional 30% upside potential remains.
This is because a little-noticed regulatory change stands to help
H&R Block finally get the revenue line moving north in coming
years. (The consensus calls for a 1% drop in fiscal 2013, but that
is likely too
.) The change: standards for tax preparers are now much tougher,
thanks to recent legislation, which is weeding out a number of
unqualified tax preparers out of the business. Some of their
customers are likely to flock to H&R Block, either for on-site
help, or through the use of the company's software.
Regardless of whether the top line grows -- and how much it grows
-- you can be pretty sure that EPS will grow at a nice clip. That's
because H&R Block still has $1.2 billion left on a current
share buyback plan.
peaked at 339 million in the third quarter of 2009, a figure that
currently stands at 300 million. If H&R Block bought another $1
billion of its stock back, then the share count would drop to 240
million. A 20% reduction in the share count instantly yields a 20%
boost in EPS -- something investors will likely take notice of, and
bid shares up accordingly.
Even before this scenario plays out, shares are already inexpensive
at less than 10 times projected 2013 profits. The fact that the
stock carries a
of almost 5% doesn't hurt, either.
Risks to Consider:
The biggest risk to both of these stocks is the emergence of a
new player that offers tax prep software at even lower price
points. No one such entrant currently exists, but the high-margin
nature of this business may prove as an enticement.
Action to Take -->
Intuit is the "sleep well at night" stock of the two. It has nearly
doubled in value since early 2010 and should best be viewed as a
solid long-term investment while shares may simply mark time in the
near-term after such a solid run.
H&R Block, on the other hand, is under new leadership (
Bill Cobb took the reins seven months ago) and the company's
back-to-basics focus on the tax business could unlock solid gains
as the business gets more of management's attention. Meanwhile, the
low P/E, solid
and massive stock buyback makes this the most appealing
tax-preparation stock, with at least 30% upside.
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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