H&R Block Inc (NYSE:HRB): A Value Stock with Strong Profitability and a Reasonable Price

In the search for investment opportunities, many investors use a disciplined, fundamental method that aims to find companies trading below their intrinsic worth. This strategy, often called value investing, involves filtering for stocks that seem priced low by the market using key financial measures, while still showing solid business health and earnings. The aim is to find good companies at a reduced price, offering a possible margin of safety and chance for price increase as the market adjusts its view.

One stock that recently appeared through such a methodical filter is H&R BLOCK INC (NYSE:HRB). The tax preparation services firm was found using a "Decent Value" filter, which selects stocks with good valuation scores while keeping acceptable levels of earnings, financial strength, and expansion. A detailed review of the company's fundamental report shows the specific measures behind this view.

Valuation: The Center of the Opportunity

For a value investor, a good valuation is the main starting point. It shows the possible discount to intrinsic value. H&R Block's fundamental report notes a Valuation Rating of 8 out of 10, meaning the stock is priced low compared to its financial results and industry group.

• Price-to-Earnings (P/E) Ratio: At 9.31, HRB's P/E ratio is called "very reasonable." This is much lower than the S&P 500 average of 27.25 and less than 85.5% of its group in the Diversified Consumer Services industry.
• Forward P/E Ratio: An even lower forward P/E of 7.90 means analysts think earnings will rise, making the current price seem more appealing. This ratio is less than almost 95% of industry rivals.
• Other Multiples: The company also looks low-priced based on other common valuation measures, including Enterprise Value to EBITDA and Price to Free Cash Flow, where it costs less than a large majority of its industry.

This group of low valuation multiples is what a value filter tries to find: a company the market may not see or is pricing with too much doubt.

Profitability: A Mark of a Good Business

A low-priced stock is only a sound investment if the core business is healthy and earns money. A low price on a failing company is a "value trap," not a chance. H&R Block's solid Profitability Rating of 8 out of 10 helps reduce this risk, showing the company creates good returns on the capital it uses.

• High Returns: The company has a Return on Invested Capital (ROIC) of 35.30%, which is with the best in its industry and beats 98.7% of peers. This shows very efficient use of capital.
• Good Margins: With a Profit Margin of 16.1% and an Operating Margin of 22.5%, HRB shows it can turn revenue into earnings well, beating a large part of its industry.
• Steady Cash Creation: The report states the company has earned money and made positive operating cash flow in each of the last five years, a sign of business steadiness.

These earnings measures are key for the value method because they confirm that the low valuation is not due to poor business results, but instead a possible market error in pricing a fundamentally earning firm.

Financial Health & Growth: Reviewing Strength and Outlook

While the valuation is interesting and earnings are solid, a full review needs to look at the company's financial strength and its expansion path. H&R Block's Health Rating is a middle 5, with clear positives and one clear negative. Its Growth Rating is 4, showing a settled but stable nature.

Financial Health (Rating: 5):

• Positives: The company has a good Debt-to-Free-Cash-Flow ratio (3.01), meaning it can pay off debt fairly fast. Its Altman-Z score shows low near-term bankruptcy risk, and it has been lowering its share count—an action good for shareholders.
• Watch Point: The main negative is liquidity, with a Current and Quick Ratio below 1.0 (0.76). This means possible issues in meeting short-term bills without using operational cash flow, a point for investors to note.

Growth (Rating: 4):

• Past Results: The company has shown very strong historical EPS growth (averaging 43.9% each year over recent years), though revenue growth has been more limited.
• Future View: Analysts think EPS will grow by an average of almost 12% each year going forward, which is seen as quite positive for a settled company, even as total revenue growth is expected to be slower.

For a value investor, middle growth in a financially stable company is often fine. The method does not usually seek very high-growth stocks, but rather settled firms where steady growth supports the idea that earnings—and thus the stock's intrinsic value—will keep rising over time.

Conclusion

H&R Block shows an example of the kind of chance a disciplined value filter tries to locate. It joins a clearly low valuation—the necessary beginning—with provably solid earnings and returns on capital. While its liquidity needs notice and its expansion is steady not fast, the total fundamental view suggests a good business that may be trading below its true value. The stock also has a reliable and increasing dividend with a yield near 3.7%, which can give income while investors wait for a possible valuation adjustment.

This review of HRB came from a methodical search for decent value stocks. Investors wanting to see other companies that fit similar standards of good valuation, earnings, health, and growth can see the full filter results here.

Disclaimer: This article is for information only and is not financial advice, a suggestion, or an offer to buy or sell any security. Investing has risk, including the possible loss of principal. You should do your own research and talk with a qualified financial advisor before making any investment choices.