H&R Block Outlook Pays A Penalty For Inconsistent Performance

Shares of H&R Block Inc HRB tumbled more than 7 percent Wednesday as investors weren't satisfied with the company's fiscal first-quarter earnings report, which prompted some analysts to reiterate a Sell rating on the stock.

BTIG's Mark Palmer maintains a Sell rating with an unchanged $19 price target after the earnings report was merely in-line with expectations in a quarter that typically accounts for less than 5 percent of its annual revenue. However, the company upset investors with a lack of color on the 2018 tax season during the conference call and only said it has no plans for a large-scale cost reduction program like it did last year.

Expectations for H&R Block have been high since the start of 2017 as evidenced by the stock's 27 percent year-to-date gain, Palmer said. But the stock is also trading at a 14.5x multiple, which is hard to justify given the company's "modest" growth profile in a highly competitive tax environment.

The company will likely face multiple contraction if President Trump and the White House introduce a tax simplification program that would likely result in a decrease in demand for services H&R Block offers, the analyst added.

Credit Suisse: Fairly Valued

Credit Suisse's Anjaneya Singh maintains a Neutral rating on H&R Block's stock with a price target raised from $29 to $30 as the company communicated four different "strategy tidbits," including: 1) management plans to improve volume performance in fiscal 2018, 2) a confirmation of a RAL return (Refund Anticipation Loans) in fiscal 2018 and potentially Free EZ filings, 3) Targeting to continue outpacing the do-it-yourself market growth, and 4) a focus on cost management initiatives.

Looking forward, investors have reason to be cautiously optimistic that the company will "find the groove" in terms of elasticity on pricing and promotions, the analyst said. Also, the recent appointment of Jeff Jones to serve as president and CEO represents a longer-term positive.

However, investors also have reason to be "wary" of the company's inconsistent performance over the past few years, Singh stated. The company needs to show more evidence of Assisted volume growth in order for investors to become more constructive on the stock.

Bottom line, H&R's stock appears to be "roughly fairly valued" in light of the positive and negative sides of the story.

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