A form 4 filed with the SEC disclosed that on July 9thGregory Macfarlane, CFO of H&R Block (HRB) purchased 6,300 shares of the company, increasing the number of his holdings by 12% to a total of 59,470. The average price of the shares Mr. Macfarlane purchased was $16.05. With the stock price since rallying to above $16.30, the opportunity to buy the stock at a lower price than the CFO is gone for now though an investor could still buy in at a similar level. So far this year, the stock is about flat.
Another H&R Block insider has been active in July. Paul Brown, a director in the firm, purchased 1,200 shares at an average price of $16.01. While this may seem like a small purchase, this same insider purchased stock in HRB last fall and benefitted from a moderate rise in the stock’s price since then (see other insider purchases at H&R Block).
H&R Block is also a favorite stock of some hedge funds. David Abrams’s Abrams Capital Management owned 12.7 million shares at the end of March; this one position represented 18% of Abrams’s 13F portfolio, reflecting a high level of confidence in the stock. Abrams had initiated the position in the first three months of 2011, after which it owned 10.2 million shares, and added the rest to its portfolio over time. Viking Global, run by “Tiger Cub” Andreas Halvorsen, also owned 23.7 million shares (see Viking Global’s other positions), up from 16.7 million shares a year before.
HRB currently trades at a trailing price-to-earnings ratio of 18 and a rather low multiple of 5.1 times trailing EBITDA. This is likely because the company has seen negative revenue growth over the past couple of years, and there would seem to be few sources of growth in the near future. At current prices the company offers a 5% dividend yield, making it a prospective income stock as well as a value stock.
H&R Block’s closest peer is Intuit (INTU) which operates in similar businesses but is much larger (a $16.7 billion market cap compared to HRB’s $4.5 billion). Intuit sports a slightly higher P/E near 24 and an enterprise value that reaches just over 11 times EBITDA. Intuit does have the advantage of a tax business focused on software (under the Turbotax brand) as well as a variety of other consumer finance businesses, while H&R Block is focused on providing tax services in brick-and-mortar offices, likely explaining Intuit’s higher multiple (and it is managing slight growth on a year-over-year basis). With a 1% dividend yield, however, it is not nearly as good a choice for income investors as HRB.
Another way to consider HRB is to compare it to other strong income stocks such as utilities, which generally have similar dividend yields to HRB’s 5%. While HRB has seen negative revenue growth over the past couple of years compared to slight positive growth for many utilities, these utilities in turn tend to trade at a higher P/E. For example, First Energy (FE) trades at a P/E of 18 with a 4.5% dividend yield. First Energy’s PE ratio is expected to increase in 2013, but it will still be 15. Duke Energy (DUK) is in a similar position. The stock’s current earnings multiple is 20 and it is expected to decline to 15 by the end of 2013. However, these are historically high PE ratios for slow growing utilities stocks. H&R Block is a volatile stock but it is expected to turn around its business and the stock’s per share earnings will be around $1.60 in 2013. That will give the stock a forward PE of 10. Buyers today will receive a high dividend and a potential for significant price appreciation. Investors don’t think the stock could hit $1.60 per share in earnings, insiders do. That’s why they are buying.