H&R Block: Tax Time Tip

03/12/2004 12:00 am EST

Focus:

Dennis Slothower

Chairman and CIO, Alpine Capital Management

"Each year our lawmakers, in their infinite wisdom, continue to make the tax laws more and more complex ," says Dennis Slothower, editor of Stealth Stocks. One beneficiary is H&R Block. Here's the advisor's tax time buy recommendation.

"I remember years ago, my father sitting down at the kitchen table and figuring out how much he owed Uncle Sam on the back of an envelope. That, unfortunately, is no longer the case, and for shareholders of H&R Block (HRB NYSE), that is a very good thing. This is pretty much a household name. You don’t have to go too far to see one of their storefronts and have your taxes prepared by a competent professional. HRB now focus on the higher-income client. They are the ones who have complex returns and can pay the higher fee for tax preparation services.

"But over the past few years HRB has grown way beyond their seasonal tax preparing business. They have expanded into home mortgages and retail stock brokerage. These areas, which they delved into a few years ago, are starting to fatten the bottom line.They also have been able to smooth out the revenue of HRB, which tails off right after tax season (April 30). This past quarter, HRB posted a profit in their second fiscal quarter, ending October. That is a first for HRB, which has been unable to achieve this feat for close to 50 years. The numbers on this number cruncher have been absolutely stellar. Over the past five years, earnings per share have grown at an average annual rate of 28%. Revenue during that same period has skyrocketed over 29% per annum. Management has also done a wonderful job with the company by expanding into other lines of products that are a natural fit, such as brokerage and mortgages.

"Return on equity over the past three years has been north of 29%, a fantastic measure of how well management is doing. It is no wonder that the Oracle of Omaha Warren Buffet’s Berkshire Hathaway owns a sizeable share of HRB. As long as our lawmakers continue to complicate an already complex tax code and HRB sticks to its knitting, I see this stock soaring higher and higher over the next several years. This might turn into a real keeper. According to my numbers, this is a stock that should be selling in the high $90s to low $100s over the next three to five years. It is currently trading in the mid- to high $50s, so HRB has a large upside potential. Buy below $66. Place a sell stop at 25% below your entry price. As the stock rises, continue to raise your stop so that you are trailing by 25%."

Related Articles on