H&R Block (HRB) Poised for Long-Term Growth Despite Risks

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On Jan 10, Zacks Investment Research updated the research report on personal service provider H&R Block, Inc.HRB .

Headquartered in Kansas City, MO, H&R Block is a leading provider of tax preparation services. Through its subsidiaries, the company provides tax, accounting and business consulting services and products through retail tax offices in the U.S., Canada and Australia, and its H&R Block At Home software and online solutions.

H&R Block has outperformed the Zacks categorized Consumer Services Miscellaneous industry driven by strategic organic and inorganic growth, with an average return of 3.3% compared with 1% of the latter, over a period of 90 days.

The company is focusing on its core tax business and has divested its H&R Block Bank. The divestment frees H&R Block from being subjected to regulations by the Federal Reserve Bank as a savings and loan holding company. Given the Affordable Care Act (ACA) laws, which demand higher capital requirements for savings and loan holding companies, H&R Block decided in favor of the divestiture. The laws proposed by the Federal Reserve would have forced H&R Block to hold back considerable additional capital. Thus, the divesture will release excess capital for strategic investment opportunities.

As part of the nationwide program for health care exchange enrolment, H&R Block partnered with GoHealth Insurance, whereby its clients can purchase their health care insurance online or over the phone through licensed GoHealth agents. GoHealth, thus helped H&R Block to foray into the health insurance brokerage business. This, in turn, will open up additional revenue-generating opportunities for the company. Furthermore, H&R Block noted that its focus on the tax business and successful navigation through the implementation of ACA has resulted in revenue improvement and margin expansion in the last three years. Also, the company expects number of ACA impacted returns to continue to grow between 20% and 25% in the next two to four years. This augurs well for its long-term growth initiative.

However, H&R Block faces huge litigations in connection with its various operating activities. The company is exposed to employment related lawsuits in various parts of the country and compliance fee litigation in Missouri state and federal courts. Such litigations weigh on investor sentiment and hamper the company's goodwill. Moreover, its debt-to-equity ratio compares unfavorably with the sector average. Additionally, the cash position of the company is fluctuating in nature. This raises skepticism about its ability to engage in de-leveraging activities.

In addition, the performance of H&R Block is tied to the overall health of the economy. With stressed economic environment and modest employment levels, the overall tax filing market is expected to remain under pressure. As a result, we expect earnings of H&R Block to remain restricted.

Nevertheless, we anticipate this Zacks Rank #3 (Hold) stock to record modest growth in the impending quarters. Some better-ranked stocks in the industry include Electronic Arts Inc. EA , Caleres, Inc. CAL and CBS Corporation CBS , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Electronic Arts has a long-term earnings growth expectation of 16.1%. It has beaten estimates in all the trailing four quarters for an average earnings surprise of 29.9%.

Caleres has long-term earnings growth expectation of 11% and is currently trading at a P/E (F1) of 15.0x.

CBS Corporation has a long-term earnings growth expectation of 13.7%. It has beaten estimates in all the trailing four quarters for an average earnings surprise of 6.2%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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