H&R Smoked, So Don't Roll Intuit
You know something's gone awry when the stock of a company that specializes in tax returns gets hammered during tax season.Shares of H&R Block (HRB) got smacked silly Friday after the tax-prep expert disclosed that it's own numbers were sloppy. HRB said it will restate results for fiscal years 2004 and 2005, plus previous 2006 quarters, mainly because of errors in calculating its state effective income tax rate.
Quickly looking over this company's financial statements, we see little that attracts us: Forget about H&R's economies of scale for a moment -- H&R's cross-promotional efforts just aren't setting the world on fire (do you see yourself going to an H&R outlet and asking for brokerage advice?). Sales have decelerated. And H&R continues to penetrate the cyclical mortgage business, which augments its exposure to interest rate volatility.
Intuit (INTU) is the tax play you want here.
Intuit, which makes personal finance software products like Quicken and TurboTax (both which have over 80% market share in their respective categories), is hitting on all cylinders. Intuit is growing its earnings faster than H&R Block and possesses a much cleaner balance sheet. The switching costs for its Quickbooks are arguably so high that it'll take an earth-shattering new piece of software to get Intuit's customers to defect elsewhere. We don't see that happening anytime soon. We like how Intuit is branching deeper into the small-business market, as well as rewarding shareholders generously -- Intuit has been deploying its ample cash flow on large stock buybacks.
If Microsoft (MSFT) couldn't kill off Intuit, maybe no one can. As long as the market for its software packages doesn't mature too quickly, Intuit should continue to capture market share and deter new entrants, who clearly have their work cut out for them. We find shares of Intuit to be a compelling investment, as they are currently trading at a discount to our fair value estimate of approximately $55 per share.
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