H&R Block (Ticker Symbol: HRB) reported better than expected earnings after the close on Tuesday of last week. The tax preparation company reported an earnings per share beat $4.32 cents per share vs. Wall Street analysts’ expectations of a loss of $4.13 cents per share. H&R Block reported strong revenues of $2.39 billion vs. Wall Street analysts’ expectations of 2.33 billion. The Kansas City-based company reported that it was also raising its quarterly dividend by 4%, to .26 cents a share, or $1.04 annually.
H&R Block announced that it would be acquiring Toronto-based Wave Financial for $405 million in cash. The company’s product and client portfolio will continue to expand after the acquisition and will hopefully strengthen its position in the small business market. H&R Block has estimated that they could potentially produce over $40 million in revenue from the acquisition by the fiscal year 2020. Wave Financial generates the majority of its revenue through payment processing, payroll services, and bookkeeping services. Currently, Wave Financial is used by over 400,000 small businesses globally each month.
Above is a long term chart of the past twenty years of H&R Block’s stock price. H&R Block had a negative start to the new millennium. After trading negatively for two years, the stock finally broke above its downtrend in the first quarter of 2001 and proceeded to rally more than 150% over the course of the next two years. H&R Block’s stock found some short term support at its 200-week Moving Average and then continued to press higher. After peaking in 2005, the stock spent the next six years in a downtrend, making lower highs and lower lows.
Starting in 2011, the stock began to form a Symmetrical Triangle consolidation pattern. In this pattern, each new lower top and higher bottom becomes more shallow than the last, taking on the shape of a sideways triangle. In the fourth quarter of 2012, H&R Block’s stock broke out of that pattern to the upside and traded back above both its 100 and 200-week Moving Averages. The stock proceeded to rally over 115%, trading to an all-time high of $37.53 on November 2, 2015. During that time, the stock began to top, forming a bearish divergence pattern, as indicated on the chart by the yellow arrows, where the stock makes a higher high in price but the Relative Strength Index makes a lower high. Traders and investors sometimes look at divergences for a possible pause within the current trend which can, at times, lead to a reversal, as occurred in H&R Block’s case. The stock pulled back and is currently trading just over 25% away from its all-time high from 2015.
(Chart above courtesy of www.tipranks.com)
Based on a survey of 4 analysts offering 12-month price targets, the average price target for H&R Block’s stock is $26.00. Based on that number, the stock is priced at a premium relative to Wall Street’s analysts and could be considered overvalued around current levels near $27.54.
The acquisition of Wave Financial will be a strategic fit for H&R Block and will give the company a chance to accelerate growth within its small business sectors. Shareholders of the stock continue to be rewarded with an increase in quarterly dividends. Investors in the tax preparation company should look to H&R Block’s next earnings release on August 19th for fresh news on the company.