In Focus

Unscrambling H&R Block (NYSE: HRB)

Running H&R Block through the Chicks' Dozen
by Chick Cheryl

In this down market we all know nothing is certain except death and taxes. The Chicks took this into consideration last night when they held their quarterly "buy" meeting. The companies up for consideration were Southwest Airlines, Walgreens, Johnson & Johnson, Kenneth Cole, Lowes, Kraft, Best Buy, Exxon and H & R Block. Guess who won?? 

H & R Block! Here's their Chicks Dozen for this Monday!! 

1. Buy What You Know
I dare you to admit you haven't heard of this place! I mean, come on, death and taxes are the only two things we can be sure of in this life! H&R Block is the very first place I ever went to have my taxes done. Why? I was familiar with them and they had a solid reputation. Wow -- what more could a company ask for? Name recognition and trust! A few weeks ago, did you happen to see their big sponsorship of ABC's tax-free "Who Wants to Be a Millionaire" week? Clearly, they're working on their cool quotient and found the right vehicle to spread the word.

2. Keep It Simple Sister
There's a reason this company is so familiar to all of us -- 90% of Americans live within 5 miles of an H&R Block office! They operate more than 10,000 locations (approximately half are franchised), serving nearly 15% of all US taxpayers. In addition, they sell tax-preparation software, provide mortgage services, and offer investment advice, financial planning, brokerage, and other services to individuals through H & R Block Financial Advisors and other units. Incorporated in 1955, I'd say this company has definitely entered the 21st century with a competitive splash... they're not just filling out tax forms anymore! They also have tax operations in Canada, Australia and the UK.

3. Industry
Their industry is "personal services".  A pretty apt title, I'd say, considering there's not much else more personal than your taxes. Their primary competitors include American Express, Intuit and Jackson Hewitt.

4. Leader In Its Fiel
Not just a U.S. leader, H&R Block is the world leader in income tax preparation. In 2000, the company served 19.2 million taxpayers -- five times as many customers as any other tax or accounting firm. They served another 1.8 million tax clients through their award-winning software program, Kiplinger TaxCut®, and through its new online tax preparation services.

With thousands of locations, would you believe they are the fourth largest retail network in the world? Amazing, huh? They're the McDonald's of taxes! Get this, Block is America's 4th largest discount broker!

5. Repeat Profitability
As I said earlier, we're always going to have taxes (no matter who we elect for president). H&R Block has certainly capitalized on this constant and now offers so much more to both diversify their revenue stream and keep it coming in year round.

Because H & R Block does the majority of its business from January to April 15th, I decided to use their annual report for their numbered criteria. Here is the income statement I used, and the balance sheet.

6. Gross Margins

(Sales - Cost of Goods Sold) / Sales

(2,451.9 - 1,216.7) / 2,451.9 =

1,117.3/2,451.9 = .4556

.46 x 100 = 46%

Not bad, we Chicks want them at 50%, but that's pretty close! (Close is only good in horseshoes and grenades. Don't try it when reporting your taxes.)

7. Net Margins

Net Income / Sales

251.9 / 2,451.9 = .1027

.10 x 100 = 10% 

The Chicks' bottom line here is 8%, and HRB is 10%. They make the cut!

8. Cash vs. Long Term Debt

Cash* / Long Term Debt

442.3 / 872.4 = 0.51

*cash, including marketable securities 

Hmmm, they're certainly not lining their pockets with cash over there. They only have half  as much cash as they do debt! We Chicks like 'em rolling in the green stuff!

9.  Flow Ratio

(Current Assets - Cash*) / (Current Liabilities - Short Term Debt)

(3863.5 - 442.3) /(3,520.4 - 283.8) 

3421.2 / 3236.6 = 1.05 

Wow, I'm actually impressed that the ratio came out that low, given all that debt! We Chicks like the Flow Ratio to be below 1.25, and HRB again cuts the mustard!

10. Increasing Growth

(most recent year's sales - last year's sales) / last year's sales = X

Again, I chose to do a yearly comparison as their quarters change too drastically.

Sales from 2000 = 2,451.9

Sales from 1999 = 1,644.7

(2,451.9- 1,644.7) / 1,644.7 =

807.2 / 1,644.7= .49

.49 x 100 = 49% increase 

Wow, now that's an increase!!! I wanted to take it one step further.since their most recent quarterly earnings of 2001 are out, I wanted to compare how they have done this past quarter to the same quarter one year ago (apples to apples).

Sales from Q1/01 =  661.4

Sales from Q1/00 = 512.5

(661.4 - 512.5) / 512.5 =

148.9 / 512.5 = .29

.29 x 100 = 29% increase

I'm impressed; the company is certainly growing in a big way! In January 2000, the company opened 98 new H&R Block Financial Centers, providing financial services, mortgages, and tax preparation in a one-stop shop format. Continued expansion is planned. Increasing its share of Web-based tax services, the company agreed to provide tax information and filing services for Yahoo's online tax center (Chick holding, Yahoo!, runs the most-used financial Web site). The number of people filing tax returns from their computer or using tax-prep software is expected to almost double to approximately 40 million people over the next five years!

11. Strong Management and History

I love when you look at a company's history and it reads like an American novel. The H&R Block story is such a slice of Americana. Following an extensive military career, Henry Bloch convinced his brother Leon to go into business with him. As we know, the company isn't H&L Bloch, so after Leon's departure, mother Bloch convinced Henry to hire his brother Richard. The rest is history. Oh wait, for simplicity, they dropped the "h" in Bloch and replaced it with a "k". There you have it, H&R Block founded in 1955 in Kansas City, Missouri. Their early success can be attributed to the old adage, "the right place at the right time". Originally, bookkeeping was their core business. Before discontinuing their struggling tax preparation service, the boys were advised to advertise. At the time, the IRS filled out your tax returns, free of charge, at local IRS offices. With rampant errors and complaints, the IRS began eliminating this service. As luck would have it, the first Bloch ad appeared at the same time the people of Kansas City were learning the IRS would no longer do their returns. Logically, these closing IRS locations became targets of the Bloch brothers, and the birth of the H&R Block franchise network soon followed.

Today, Henry Bloch serves as Honorary Chairman of the Board. Frank Salizzoni recently left his post as CEO and became Chairman, and Mark Ernst, formerly of American Express, became President and CEO.

12. Buy On Sale

52 week high: 52.39

52 week low: 26.93

52 week average: 39.66

Current stock price (as of 3/8/01): 52.25