H&R Block (HRB) Takeover Rumors Not Seen as 'Far-Fetched' - BTIG

August 15, 2016 11:30 AM EDT
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Price: $23.27 -1.65%

Rating Summary:
    3 Buy, 9 Hold, 1 Sell

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    Up: 6 | Down: 9 | New: 6
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BTIG analyst Mark Palmer commented on H&R Block (NYSE: HRB) following rumors last week that the company could be preparing to offer itself for sale. In his view, the idea that H&R Block could attract a bid from private equity is not far-fetched."

"...we find it feasible that private equity firms with a focus on the consumer finance space would consider a bid for HRB. The stock does not appear expensive at current levels, management has maintained leverage at levels supportive of investment grade ratings, and the company throws off a healthy amount of free cash flow. Additionally, the company appears to provide the kinds of opportunities for operational improvement – the ability to rationalize its network of 3,599 franchise and 6,614 company-run offices, to better exploit the opportunity to serve Hispanic communities, and to leverage its Emerald prepaid debit card, among others – sought by private equity players." said Palmer.

The analyst continued, "A private equity firm could lever up HRB beyond the currently targeted levels, using the company’s ample free cash flow to support the increased debt burden. It also could reintroduce RALs in the form offered by its branded peers: the new loans are offered as 'free' to consumers and lack the high upfront fees associated with the original RALs, but consumer advocates suspect that the fees of $35 to $45 per loan charged to preparers by issuers are passed on to consumers through higher tax preparation fees. Such a move could at least provide HRB with a more level playing field as it seeks to restore its market share."

Palmer added, "With that said, the current political environment could give private equity firms pause for now. As we noted on April 5, Republican presidential candidate Donald Trump’s comments about tax policy and HRB last August mean his candidacy also represents a threat to the company and the stock. “I want to put H&R Block out of business,” Trump said in response to a question about his tax simplification policy. While Trump’s poor recent performance in the polls, or the belief that such commentary would be unlikely to translate into policy action if he were to be elected, may help to address private equity investors’ reservations, his comments could cause such investors to put their thoughts about making a bid for HRB on hold until after November’s U.S. presidential election provides clarity."

For an analyst ratings summary and ratings history on H&R Block click here. For more ratings news on H&R Block click here.

Shares of H&R Block closed at $24.56 yesterday.

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