Two Bets on Block

09/12/2003 12:00 am EST

Focus:

Richard Band

Editor, Profitable Investing

I'm always intrigued when two advisors--both with exceptional long-term records--recommend the same stock. Such is the case with H&R Block, which is the latest featured buy from value investor Richard Band, as well as global investor, John Dessauer. Here are their comments.

Says Richard Band, editor of Profitable Investing, " H&R Block (HRB NYSE) boasts a rock-solid, recession-resistant franchise. Despite the fluff we hear from politicians, the income tax isn’t about to go away, nor is it becoming any simpler. Last year, HRB prepared returns for 19.4 million taxpayers in the United States, Canada, and Great Britain. For do-it-yourselfers (3.4 million of them), HRB provides the Kiplinger Tax Cut software as well as an online tax-preparation service. The company has also branched out into securities brokerage and mortgage lending, among other financial services.

"Over the next five years, Wall Street is projecting 15% annual growth in earnings. I don’t take that guess as gospel, but I think it’s reasonable when you consider that HRB has boosted its profits at a 27% rate in the past five years. What really intrigues me, though, is that HRB is trading at less than 12 times this year’s estimated profits. In my view, that’s a bargain. Buy at $45 or less. I’m looking for a gain of 20%–30% in the coming year with this blue chip. As an added bonus, the stock throws off a modest dividend yield of just under 2%."

"Second fiscal quarter earnings at H&R Block were much better than Wall Street estimates," adds John Dessauer, editor of Investors World. "Earnings were $0.06 a share, which was $0.05 better than expected. The best news was a surge in mortgage origination volumes. Block’s mortgage business is more purchase-oriented than refinancing-oriented. This business will remain strong, because housing sales are holding up well. Wall Street worries that the mortgage business will fall off the cliff, so they don’t assign much value to these higher earnings. Management says earnings this year will be up 13% to 18% from last year’s $3.15. Wall Street uses the low end of the range for current estimates of $3.55.

"In addition, tax season, when Block makes most of its profit, is far off. But the US tax code isn’t getting simpler; it is more complex than ever. It takes a professional to file the correct forms, so Block’s tax business is likely to do better than expected in 2004. The stock is trading at 12 times the low-end estimate. Historically, the stock trades at 17 times earnings in a strong market. My 12-month target is $60. H&R Block is a buy."

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