Shareholders of H&R Block would probably like to forget the past six months even happened. The stock dropped 39.2% and now trades at $31.63. This may have investors wondering how to approach the situation.
Is now the time to buy H&R Block, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think H&R Block Will Underperform?
Despite the more favorable entry price, we're swiping left on H&R Block for now. Here are three reasons there are better opportunities than HRB and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, H&R Block’s sales grew at a weak 5.6% compounded annual growth rate over the last five years. This was below our standard for the consumer discretionary sector. We note H&R Block is a seasonal business because it generates most of its revenue during tax season, so the charts in our report will look a bit lumpy.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
H&R Block has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 16.3%, below what we’d expect for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, H&R Block’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
H&R Block falls short of our quality standards. After the recent drawdown, the stock trades at $31.63 per share (or a forward price-to-sales ratio of 1×). The market typically values companies like H&R Block based on their anticipated profits for the next 12 months, but there aren’t enough published estimates to arrive at a reliable number. You should avoid this stock for now - better opportunities lie elsewhere. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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