DK Equities Confirms Buy Rating on H & R Block. :: Business Articles and Info

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DK Equities Confirms Buy Rating on H & R Block.
Added: 04/10/2004 Type: Summary Viewed: 770 time(s) [ Not Rated Yet ]

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DK Equities Confirms Buy Rating on H & R Block.

H & R Block provides tax preparation and financial services to the general public mainly in the US and Canada. Block, with great brand equity and a leading 15.3% share of individual tax return preparation, generated $987m in pretax income in FY03.

Several events have occurred during this past week that led to the review and confirmation of the BUY opinion.

H & R Block scored a courtroom victory on March 31st after a federal judge tossed out all but one count in a six year old class action suit regarding tax refund anticipation loans. In addition, the judge eliminated a large portion of the 17m-person class by ruling that arbitration clauses contained in many of the client contracts are enforceable.

Separately, on April 1st HRB released tax season data through March 15th that showed a 2.4% year-over-year decline in retail office clients as total number of clients increased .4% thanks to 15.2% more digital tax solutions clients.

The market reacted very negatively (shares fell 3.8% Thursday) to the fall off in retail office clients after HRB had previously projected 1-4% growth. Concerns over possible loss of market share to the likes of Jackson-Hewitt and Liberty Tax as well as under-utilization of refund anticipation loans (RALs) by Block’s customers were factors that may have also precipitated an 18% share price decline since early ’04.

With numerous negatives already reflected in the share price, we expect a focused management team to successfully address above shortfalls in the year ahead. Meanwhile, the inherent attractiveness of HRB’s major business lines should stay intact. Lastly, we see material free cash flow generation continuing. Coupled with increasing rating agency flexibility due to “stocked up” capital, we anticipate greater share buybacks, especially at current stock price levels, which lie substantially below our estimate of intrinsic value. Buy rating is confirmed.

DK Equities provides independent, buy side research focused on investor needs. With no investment banking ties DK Equities offers a truly unbiased and disciplined approach to primary research.

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