Saturday, December 11, 2010

H & R Block a Structurally Challenged Business?

H & R Block HRB gave results on Friday and they appear to be confirming my feeling about this company. I think they are company that benefits from a cyclical upturn in employment (employees filing more tax returns) but who are structurally challenged by rivals such as Intuit.

In a sense H & R Block is the archetypal Warren Buffet type of stock. Indeed, he has formerly held large stakes in this company. It has a strong market position, holds a good competitive boat and generates lots of cash flow. A classic Warren Buffet ‘annuity’ type of stock, whose position in the heartland of America (via opening stores in Wal-Mart and such like) is assured. However, technology is no respecter of tradition or of Warren Buffet.

Intuit’s (do it yourself software based solution) has been eating into market share. Furthermore, the pick up in employment in this recovery-so far- has been noticeably behind previous recoveries. Moreover, employment gains have not yet compensated for the losses in employment during the recession.

So we have a business that is structurally challenged. They look set to benefit from a cyclically pick up, but I would prefer more pure plays on economic recovery than H & R Block.