On Friday, Goldman Sachs maintained its Sell rating on shares of H&R Block (NYSE:HRB) with a steady price target of $44.00. The firm's analysis followed H&R Block's fourth-quarter results which concluded the 2024 tax season. The results presented no significant surprises as the main tax season figures had been disclosed in the previous quarter.
H&R Block's forecast for fiscal year 2025 was characterized as cautiously optimistic by the firm, with the company predicting around 1% industry volume growth. Despite expectations to hold steady in market share within the overall tax category and to implement low-single-digit price increases, there are concerns.
H&R Block anticipates a continued decrease in market share for its core assisted in-person tax preparation services, albeit at a slower rate than the previous year. This decline is expected to be somewhat balanced by gains in the do-it-yourself (DIY) tax segment.
Goldman Sachs pointed out several challenges that H&R Block is likely to face. These include the ongoing shift towards DIY tax solutions, increased competition from rivals such as TurboTax in the assisted tax preparation market, potential substitution effects from the IRS Direct File program, and competitive pressures from Generic Artificial Intelligence (Gen AI) technologies.
Furthermore, the firm predicts that persistent losses in the assisted market segment will contribute to a downward pressure on H&R Block's valuation.
However, the firm also noted that this negative outlook might be partially offset by H&R Block's solid dividend growth and its share repurchase initiatives. Despite these positive financial strategies, the overarching secular trends and competitive landscape are expected to influence the company's performance negatively. Goldman Sachs concluded by reiterating its Sell recommendation for H&R Block's stock.
In other recent news, H&R Block has reported a robust performance for fiscal year 2024, marked by significant increases in revenue, EBITDA, and earnings per share (EPS). The company's do-it-yourself (DIY) tax preparation business has seen substantial market share gains, contributing to overall growth. In addition to these financial results, H&R Block has raised its quarterly dividend by 17% and initiated a new share repurchase program valued at $1.5 billion.
For fiscal year 2025, H&R Block projects revenue between $3.69 billion and $3.75 billion, EBITDA between $975 million and $1.02 billion, and EPS between $5.15 and $5.35. These expectations are partly attributed to a low effective tax rate. The company's strategy is geared towards driving annual revenue growth of 3-6% and leveraging its cost structure to exceed the pace of revenue growth in EBITDA.
Recent developments also highlight H&R Block's acquisition of 158 franchise offices in FY 2024, which is expected to bolster long-term revenue and earnings growth. However, challenges persist in the Assisted tax preparation segment, which is seen as a headwind.
Despite these challenges, the company remains committed to improving the client experience, particularly in the Assisted channel, while maintaining market share and attracting TurboTax clients.
InvestingPro Insights
Amidst the cautious outlook presented by Goldman Sachs, it is worth noting some key metrics and initiatives that may provide a broader perspective on H&R Block's position. The company boasts a solid track record with its dividend, having raised it for 8 consecutive years and maintained payments for 54 years, which speaks to its commitment to shareholder returns. Additionally, management's aggressive share buyback strategy underlines confidence in the company's intrinsic value.
InvestingPro data paints a picture of a company with a moderate valuation, with a P/E ratio of 13.1 and an adjusted P/E ratio for the last twelve months as of Q3 2024 at 12.51, suggesting that the stock may be trading at a discount relative to near-term earnings growth. The company's return on assets for the same period stands at an impressive 20.08%, highlighting efficient use of its assets to generate earnings.
Despite the challenges outlined, H&R Block's performance in the market has been strong, with a 52.46% return over the last year and trading near its 52-week high, which could indicate a resilient business model and investor confidence in its long-term strategy. For those interested in a deeper dive into H&R Block's financial health and future prospects, InvestingPro offers additional insights, including 10 more InvestingPro Tips for H&R Block at https://www.investing.com/pro/HRB.
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