H&R Block: The Good, The Bad and The Ugly
Guidance was so wide you could drive a truck through it.
Editor's Note: This article was written by Steve Zausner, who runs the Vicis Capital London office and has a background as a derivative/credit analyst.
H&R Block (HRB), the good, the bad and the ugly....
- On a headline basis, the company almost made its numbers. That almost is about as good as it gets for these guys.
- Raised their divided a penny.
- Mortgage Service revenues were down 20 percent and earnings were down 55 percent. Showing that without a certain level of volume, this business line has no ability to maintain margins. Originations were down 7 percent.
- Tax Segment margin contracted 150 bps for the year to 26.6 percent. Other reports show HRB losing market share to Hewitt (HEW).
- No share repos in the period. Announced an additional 20 million share repo (why don't they just use up the original 10.5 million?)
- Throwing in the towel on the growth story: HRB is scaling back office openings to the range of 300-400 for 2007, representing a deceleration from the 10-12 percent growth rates for the prior two years.
- Guidance was so wide you could drive a truck through it.
- A really bad trend continues: over the past few quarters organic growth has been decelerating at an alarming pace. On an organic basis, revenues were down roughly 10 percent yoy. Again, HRB has shown no ability to manage its costs into these declines, margins are down 110 bps yoy.
- Weakness in the residual loan book: There has been a marked increase in the amount of first payment delinquencies at HRB. While delinquency rates are holding in the 12 percent range and down from nearly 15 percent at the peak in 2002, HRB's average FICO score has dipped to 613 from 621 (showing that they are willing to take on even the most incremental of mortgages). Residuals were written down by a net $5 million. Residuals are running about 25 percent of loan production.
In my estimation, a company with several quarters of negative revenue growth, that admits to cutting back its future growth plans, whose best business line is selling mortgages to people that no bank in its right mind would lend to (though, unfortunately, there are many not in their right mind) is troubled. Trading at 14x TTM earnings, 12x next fiscal year and 11x the out year, with an EV/EBITDA valuation in the high single digits and a 2 percent FCF yield, is not yet a value story.
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