H&R Block: Prospects and Opportunities

Tax season may be long gone, but there are still reasons to be optimistic about H&R Block stock as it prepares to announce its earnings on Wednesday.

H&R Block (ticker: HRB) faced challenges earlier this year, with its shares dropping 23% by mid-May. Concerns were raised about the potential impact of the Internal Revenue Service offering free online tax filings, as well as a lackluster fiscal third-quarter earnings report. However, the stock has since recovered most of those losses and currently stands at $36.63, only down 2.4% in 2023 as fears of competition from the IRS have subsided.

But the potential for further gains remains. Even with its recent recovery, H&R Block shares appear undervalued, trading at 8.7 times forecast earnings — below its five-year average of 10.2 times. Bridging this gap suggests a potential 17% increase in share price from current trading levels.

H&R Block has various avenues to achieve this growth.

In response to customer complaints and in an effort to improve transparency, the company had to readjust prices for its main assisted tax-preparation product five years ago. Since then, it has seen a more consistent increase in volume. Now, CEO Jeff Jones has stated that the company has the opportunity to introduce small price increases in the low single digits.

Additionally, H&R Block has actively expanded its services, aiming to offer more options to customers throughout the year. This strategy was unveiled three years ago, with the goal of transforming historically challenging nine-month periods into profitable quarters. Although its fiscal third quarter will continue to be the strongest, the company has diversified into other financial offerings that include banking services and year-round payroll and tax services for small businesses — all in an effort to bolster historically weaker quarters.

H&R Block's Mobile Banking Platform Shows Promise

In its quest for continued growth, H&R Block introduced Spruce, the company's mobile banking platform, in January. This innovative platform offers savings and debit accounts, and has already garnered a noteworthy response. As of April 30, Spruce boasts an impressive 291,000 customer sign-ups and a substantial $288 million in customer deposits. These early results have demonstrated the platform's potential, according to H&R Block.

Another notable development for the company is the success of its small-business platform, Wave. Acquired in 2019, Wave has allowed H&R Block to expand its year-round accounting services. With a 10% year-over-year revenue growth, this offering complements the company's overall strategy effectively.

Collectively, these initiatives position H&R Block well to achieve its annual revenue growth target of 3% to 6%.

H&R Block's upcoming earnings report will provide further insight into the company's progress. Analysts project a profit of $1.88 per share on sales of $1 billion—an increase of 31% and a slight downturn of 3.5%, respectively. Furthermore, stock buybacks may positively impact earnings as H&R Block has already repurchased $350 million worth of stock in the first half of the fiscal year. Over the past five years, the company has retired about 25% of outstanding shares, displaying a prudent yet opportunistic approach to such decisions.

While competitive threats remain ever-present, H&R Block seems well-prepared to navigate them. Although the IRS may introduce its own filing service, it is unlikely to venture into tax preparation or offer user advice. Additionally, H&R Block recently announced a partnership with Microsoft (MSFT) that leverages Azure OpenAI services to enhance consumer tax preparation.

With these developments in place, H&R Block appears poised for success—especially as it embarks on the next tax season.