– By GF Value
The stock of H&R Block (NYSE:HRB, 30-year Financials) gives every indication of being modestly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $22.29 per share and the market cap of $4 billion, H&R Block stock shows every sign of being modestly undervalued. GF Value for H&R Block is shown in the chart below.
Because H&R Block is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which is estimated to grow 0.68% annually over the next three to five years.
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. H&R Block has a cash-to-debt ratio of 0.10, which is worse than 85% of the companies in Personal Services industry. The overall financial strength of H&R Block is 3 out of 10, which indicates that the financial strength of H&R Block is poor. This is the debt and cash of H&R Block over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. H&R Block has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $2.9 billion and earnings of $0.39 a share. Its operating margin is 15.81%, which ranks better than 81% of the companies in Personal Services industry. Overall, the profitability of H&R Block is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of H&R Block over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of H&R Block is -2.1%, which ranks worse than 71% of the companies in Personal Services industry. The 3-year average EBITDA growth rate is -32.1%, which ranks in the bottom 10% of the companies in Personal Services industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, H&R Block’s return on invested capital is 7.04, and its cost of capital is 3.54. The historical ROIC vs WACC comparison of H&R Block is shown below:
In conclusion, The stock of H&R Block (NYSE:HRB, 30-year Financials) appears to be modestly undervalued. The company’s financial condition is poor and its profitability is fair. Its growth ranks in the bottom 10% of the companies in Personal Services industry. To learn more about H&R Block stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.