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Death and Taxes: HR Block thrives in the new economy

Today's Financial News - Posted March 6, 2009

H&R Block just beat earnings expectations. That should come as no surprise to anyone paying taxes this year!

by J. Christoph Amberger

Baltimore—TFN: Now here’s a surprise! Tax preparer H&R Block (NYSE:HRB) announced that fiscal Q3 net profit was $47.4 million, or 14 cents share, up from a loss of $47.4 million, or 14 cents a share, in the year-ago period.

Revenue for the quarter ended Jan. 31 rose 11% to $993.4 million. Revenue growth was attributed to a rise in the number of tax returns prepared and higher net average fees.

Net debt had been reduced by $2.5 billion in the past year.

Now, surely, nothing worse that can happen to a consumer economy than a Discretionary Spending Depression.

It takes a village, or a stimulus package, to destroy a consumer nation’s urge to splurge. But once you succeed, the chain reaction is almost unstoppable. Look at any market sector, and you’ll see the effects of demand destruction in every spreadsheet and every quarterly report.

Which makes it difficult to select a company whose investment prospects don’t require blind faith in hope and change.

But there’s one line item in any household’s spending that never goes down. For those 45% of American households responsible for keeping the economy afloat, it’s the biggest single expense. And it’s not discretionary at all. It’s mandatory, coerced, and rigidly enforced. You can go to jail if you don’t pay up.

Or at least face an uncomfortable question on a Senate confirmation hearing. Because in this world, nothing is certain but death and taxes.

Spend on tax

Even in the best of times, tax returns are a headache. But I bet this year it’ll be ten times worse: Figure in the financial and tax upheaval caused by unemployment, stock market losses, mortgage defaults, and you’re looking at a nightmare for the individual taxpayer pecking his way through his 2008 tax forms on Quicken.

Which is why I think tax preparers will be incredibly busy this year. Not that the talent pool of the Obama Administration and others who habitually don’t pay taxes are suddenly inspired to do so. But this year, filling out forms will be so much more complex!

Out of all publicly traded tax preparers, H&R Block has experienced the lowest share price volatility over the past 2 years. It’s made a masterful move by placing tax services within Sears stores—which appears to be the one retail chain that’s still making money and attracting traffic.

While seasonal in nature, tax preparation is a business with an extremely high return on equity. Plus, in a time of consumer credit crunch, it’s tax refund anticipation loans are a cash cow, not just for H&R Block but for the entire tax preparation industry:

Refund anticipation loans are really a license to print money. Figure a loan fee ranging anywhere from $29.95 to $89.95, plus electronic filing fees of around $40, and your short-sighted, cash-strapped taxpayer gets a loan for the amount of his refund (usually up to $5,000) within one to two days. When his refund is received in a special bank account set up by the lender, the loan is repaid.

The average loan time is ten days. Repayment is guaranteed—after all, it’s Uncle Sam cutting the check. The fees for an average refund of just under $2,000 translate into an annual percentage rate of 222.5%. According to the Consumer Federation of America and the National Consumer Law Center, some taxpayers pay the equivalent of an APR of over 2,000%. Some countries would still stone you for usury. But in a typical year, 12 million taxpayers pay over $900 million dollars in fees to get their refunds a little faster.

I bet that this year, there will be more.

The Obama Bear Market has mauled this perfectly good stock. I was recommending this stock at around $20… and still think at $18 and change we can make a decent gain on it!


Next Article: Small-cap investors welcome General Motors to their realm

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Posted by J. Christoph Amberger · Filed Under Featuring..., US Stocks and Markets 

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