AI Innovations And Critical Moves Enhance Service And Propel Revenue Growth

Key Takeaways

• H&R Block's focus on AI and digital enhancements is driving revenue growth and improving client retention, particularly through Block Horizons initiatives.
  
• The company’s expansion into mobile banking with Spruce and improving small business services are boosting client acquisition and revenue streams.
  
• Rising operating expenses and competition threaten net margins and market share, while AI investment poses cost risks without ensuring revenue boost.

Catalysts

Through its subsidiaries, engages in the provision of assisted and do-it-yourself (DIY) tax return preparation services to the general-public primarily in the United States, Canada, and Australia.

• H&R Block is focused on operational and technical enhancements to improve the client experience, particularly through its Block Horizons strategic imperatives. The company is investing in AI tools like AI Tax Assist, improving user onboarding, and enhancing digital services, which are expected to drive higher revenue growth and improve client retention.
  
• The company is experiencing double-digit revenue growth in the Assisted small business tax segment, leveraging its cost-effective bookkeeping and payroll services marketing. This is anticipated to positively impact revenue growth through the expansion of services offered to small businesses.
  
• H&R Block's mobile banking platform, Spruce, which has surpassed $1 billion in customer deposits, aims to efficiently acquire clients and increase year-round user engagement. This focus is likely to enhance revenue streams and contribute positively to the bottom line by converting banking clients to tax clients.
  
• The increase in AI utilization and digital tools in H&R Block's DIY and Assisted channels is expected to reduce costs and enhance the efficiency of tax professionals. This could lead to improved net margins as operational efficiencies and user satisfaction increase.
  
• The company is advancing its capital allocation strategy by repurchasing approximately $210 million of shares, which is expected to drive earnings per share (EPS) growth as the reduced share count boosts profitability metrics.

H&R Block Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming H&R Block's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.2% today to 19.1% in 3 years time.
• Analysts expect earnings to reach $751.0 million (and earnings per share of $5.65) by about November 2027, up from $587.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.4x on those 2027 earnings, up from 12.9x today. This future PE is lower than the current PE for the US Consumer Services industry at 18.7x.
• Analysts expect the number of shares outstanding to decline by 1.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.66%, as per the Simply Wall St company report.

H&R Block Future Earnings Per Share Growth

Risks

• The increase in operating expenses, particularly due to higher labor costs and legal fees, could potentially reduce net margins if not managed effectively in relation to revenue growth.
  
• The tax season is expected to see only about 1% growth, reflecting a stable market with little to no major tax law changes. This modest growth expectation could limit revenue expansion ambitions.
  
• The continued competition, especially from large players like Intuit moving into the assisted tax preparation market, might impact H&R Block’s ability to gain or retain market share, thereby affecting revenue.
  
• Although investments in AI and technology are intended to enhance services, they come with the risk of increased operational costs and the challenge of ensuring these innovations convert into tangible revenue increases.
  
• The Direct File service, while currently not impacting business materially, represents a risk in terms of future shifts in consumer preferences towards free filing solutions, potentially affecting revenue streams from paid services.

Valuation

• The analysts have a consensus price target of $62.67 for H&R Block based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $70.0, and the most bearish reporting a price target of just $50.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.9 billion, earnings will come to $751.0 million, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 6.7%.
• Given the current share price of $55.4, the analyst's price target of $62.67 is 11.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.