H&R Block: Stars Are Aligning

After the seven month market melt up, it is quite difficult to find a long idea that has: a cheap valuation, a real dividend, a brand/franchise, analyst sentiment that will likely improve, and multiple catalysts in the form of positive surprises. H&R Block (NYSE: HRB) possesses all of these characteristics and could be a double from current levels regardless of what the overall market does. H&R Block is a world-class franchise that is on the precipice of a fundamental improvement in its competitive landscape that will provide HRB with its largest competitive advantage in decades. The changing operating landscape discussed below should drive earnings estimates materially higher, which will lead the cadre of neutral rated analysts to upgrade their ratings. Shockingly, not one analyst has written about the disruptions in the financial service products segment, including refund anticipation loans (RALs), which could cripple H&R Block’s competition. To top it off, HRB trades at a 37% discount to the S&P 500 with a healthy dividend yield to boot.

As Wall Street will come to realize (to the benefit of HRB), RALs represent roughly 6% of earnings at H&R Block. However, without RALs, most of H&R Block’s competitors would lose 100%+ of their earnings. As I articulate below, the disruptions occurring today could impact more than 11 million returns in 2010, compared to 15 million tax returns performed at HRB’s retail locations. Under the best case scenario for HRB’s competitors, they will have to significantly increase their pricing. Under the worst case, many will be out of business.