Trump Can’t Stop This Midwestern Company’s Surge

In 2015 when President Donald Trump was campaigning, he told CNN’s Joe Scarborough: “It would be a dream of mine to put H&R Block right out of business.”

Last month, shares of the Kansas City-based tax preparer fell 18% in a day … and even more over the next couple weeks.

That likely made Trump smile.

The one-day drop was the company’s largest ever.

But it isn’t the first time shares have moved like this.

This stock has posted six of its nine worst one-day price drops since December 2015. Trump’s talk likely had something to do with that.

Tax reform passed last year. Tax preparation is more straightforward today. Yet, I believe we still have an opportunity with this name.

In the past, smart investors made money when the stock fell. I believe you can do so this time, too.

Let’s dig in, and you can judge for yourself…

Making Money in the Heartland

H&R Block Inc. (NYSE: HRB) is a $5 billion company with a long history of generating cash.

Henry and Richard Bloch founded the tax firm in 1955. Before that, another of their companies offered tax services as a courtesy to its business clients. When it took a chance and offered these services to the public, revenue tripled in a year.

The firm created an industry … and it hasn’t looked back.

Since 1987, its free cash flow has been positive every year except two.

Since 2009, it has bought back more than 37% of its shares.

Today, it has more cash than debt.

But shares just hit a road bump. The company said results for its 2019 fiscal year that ends in April should fall below analyst forecasts. Management expects Trump’s simpler tax code will hurt business.

The firm expects sales will be between $3.05 and $3.1 billion. Analysts were expecting $3.14 billion.

They expect earnings will fall even more…

But we can still make money.

How the Company Will Turn This to Its Advantage

As I mentioned, H&R Block has seen this kind of turmoil before. Since it went public it has seen its shares fall more than $1 in a single day more times than they have risen that much. On those down days, its share price has fallen a total of $136 … while it only increased $105 on the up days.

It’s tough to be a seasonal, cash-spewing company.

Think about it. H&R Block makes its money during tax season. Period. Last year, it earned 75% of its sales and more than 100% of its total earnings in the quarter that ended in April. (It lost money in the other three quarters.)

But this company isn’t struggling. The same analysts I mentioned above expect H&R Block will earn $1.92 per share this year. That’s only four cents less than 2017 … and $0.38 more than 2016.

Its shares traded for more than $27 during those two years. They’re around $24 today. I expect they’ll return to their previous levels. And I’m not the only one.

An H&R Block insider is buying, too. After the stock fell hard in June, one of its directors bought more than $23,000 of shares. In the past, when H&R Block insiders bought, the price responded:

H&R Block

(Source: Bloomberg)

The above shows insider buys (green) and sells (red) since 2010. You can see that patient officers and directors of H&R Block have a history of making money after the stock drops.

The dividend is greater today than it was back then. Today, investors receive $1 per share in dividends. That’s a 4.3% yield.

H&R Block loves to reward its shareholders. It has paid a dividend every quarter for more than 40 years.

A Sensible Speculation

Listen … I’m all for making taxes easier. And this situation is still evolving. We won’t know exactly how tax reform will affect the people who use services like H&R Block until next tax season.

That makes any investment in H&R Block a speculation. If you don’t like that term, don’t invest in this stock.

But I believe it’s a reasonable investment.

Shares have sold off recently. The market has told us how many people it expects will now do taxes on their own.

The company has a history of bouncing back, though.

Plus, taxes are important to people. Penalties are high if you make an error. People want to make sure they get their taxes right … and get as much back as possible. A simpler tax code doesn’t eliminate human fear … or greed.

And if you buy H&R Block today, you can earn several dividends prior to tax time to apply against the cost of your tax return.

Good investing,

Brian Christopher

Senior Analyst, Banyan Hill Publishing

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