Smart Stocks Investing

H&R Block Starting to Add Up

Nathan Kawaguchi submits:

Value investors typically look for bargains in either cheap assets or cheap cash flows. Stocks are rarely bargains when a company is prosperous and everyone loves it. Bargains are most often found under a cloud. And there are certainly clouds hanging over H&R Block (HRB) these days. Because investment returns are simply a function of what you pay versus what you receive, the drop in price at the end of February prompted another look.

Like many investors, I followed H&R Block for years as their network of company-owned and franchised locations grew across the U.S. Block’s leading market position, strong brand name and low capital requirements made it an attractive free cash flow generator with high returns on capital. Unfortunately, Block became heavily involved in subprime mortgage lending through its Option One subsidiary at exactly the wrong time. The mortgage losses began eating up all of the free cash flow from the core tax preparation business. Within the past couple years, Block has discontinued the mortgage origination business and sold its financial advisory business in order to return focus to its core tax prep business.

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