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H&R Block, Inc. Message Board

  • too_far_in_the_red too_far_in_the_red Sep 16, 2008 10:12 AM Flag

    Credit crises, burn rate, short squeeze and opportunity

    Today will be an interesting day in the market. The Fed may cut interest rates which will support the market - or not. In any event today will be volatile.

    CREDIT CRISIS

    The credit crisis is developing into a real drag on the economy. Businesses with difficulty accessing the credit markets can't expand and might lay off employees instead.

    Block is using a credit facility, called a CLOC, as a substitute for the commercial paper market. I believe there is 1.7 billion dollars left in borrowing capacity.

    Several days ago I mentioned that HSBC was abandoning the independent tax preparer market for tax refund loans. If this crisis forces HSBC to cancel it's participation these loans with Block that would create a serious impact to next year's earnings.

    BURN RATE

    The burn rate is a concept from the good old dot com days where the companies were rated on how long their money would last until it was all spent.

    Block has approximately two billion dollars in borrowing capacity and cash left based on last year's results that is sufficient to last until the tax season begins.

    SHORT SQUEEZE

    Block declined at a rate significantly less than the market yesterday. It might decline more than the market today, or show a slight gain. Be my guest if you wish to short H & R Block (HRB). It may decline more than the general market today. It is possible that even if the stock rises a little the associated put options might increase in premium.

    Just remember this stock is prone to sudden corrections that squeeze shorts mercilessly.

    OPPORTUNITY

    A value investor or options trader willing to take the risk might want to consider selling covered puts if the stock declines several percent today.

    My own concern with this strategy is that with the credit crisis deepening bad news could force HRB down below $22.00 per share, which could trigger a greater decline.

    I own HRB but do not actively trade the stock or it's associated options.

    Good luck, everyone is going to need it today.

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • reserve money market funds below a dollar. i think hrbfa supported them,hopefully this doesn't affect the sale to ameriprise.oops

    • Good research.

      The link to the ratings is:

      http://www.bankrate.com/brm/safesound/thrftmm.asp?fedid=1000018001
      ----
      That's as low as it gets. Who'd want to buy it? - moorelindaellen

      The answer is institutions. They may be selling puts to time the market.

      They've done very well this year. Shorts, not so well.

      Again, thank you for the top notch research.

    • You rate this stock a hold.

      I contend that the undisclosed future mortgate exposure is massive, an estimate in this thread (not by me) is $750MM.

      I contend that Leasholds are a huge UNDISCLOSED liability.

      I contend that legal costs and settlement expenses wil be HUGE. HRB isn't reserving for or expecting large expenses.

      There have been a lot of companies go for less than the desks (AIG, LEH, FRE, FM). I don't buy the good name / good will expectation in light of these huge warning signals.

      You are free to pay 9X Inflated Fake Book Value, and I'm free to sell it to you (oh yeah you don't even rate this a buy).

      Best of luck

    • “Perhaps the $1b is really meaningless because HRB can't sell ANYTHING for more than book”

      Huh?

      The value of a profitable tax business is more than the book of desks, computers, leaseholds, etc. In fact, various intangibles like name recognition, customer lists, workforce, etc. are multiples of the book value of tangible assets.


      You really don’t know what you’re talking about here…

    • You asked a few questions I can answer.
      ----
      What is your estimate of future mortgage losses from repurchases?

      What is your estimate of future losses from the massive amount of "Held for Investment" mortgages on the balance sheet? - skier71

      My guesstimate is a total for both classifications in your two questions is $755,000,000.00. That is a worse case scenario. Several million were written off this past quarter, with an additional increase in the bad debt reserves.
      ----
      For your legal questions, refer to an attorney.
      ----
      I really wish I could point to other interesting articles questioning HRB. - skier71

      Where are you getting your information? Block reports material events, with a delay before publication in some cases. If you have any reliable sources their information would help us make more informed decisions.

      As you pointed out the articles you can read are older news from when Block still had the sub-prime operations and money losing brokerage.

      Caution is well warranted. Current articles would be welcome.

      Good hunting.

    • Buffoon,

      Quite funny. The mere fact that at one time in history HRB paid $1b more than the net asset value of something is very cool! How neat I'm sure because of the money will roll in until the end of time.

      OR

      Perhaps the $1b is really meaningless because HRB can't sell ANYTHING for more than book (look at their recent transactions) and all they are left with is a MASIVE contengent liability, huge real estate liabilities, UNREALISTIC valuation of "Mortgages Held for Investment", and no catalysist for growth.

      I guess time will tell, but it appears that is at least one buffon with a keyboard.

    • “What are your feelings about $1b in good will on the balance sheet? RALs have turned HRB into a Payday Loan / Check Cashing loan shark. This industry has NO good will in my book.”

      Maybe you should lookup what balance sheet goodwill means you buffoon.

    • Correct me if I'm wrong but there is a much lower short interest in HRB than the average NYSE stock?

      In this credit crunch can HRB really access $1.7b?

      What is your understanding of HRB's exposure to additional required mortgage purchases?

      You mentioned "Value Investor", help me understand 9x book and losses for years past and to come because of mortgages. This doesn't seem like a value proposition to me. Borrowing to pay dividends and borrowing for a stock repurchase plan insures that the insiders will get out and you'll be left holding the bag.

      I see HRBs every where, more so than Krispy Kream or Starbucks (both of which are closing locations). How can HRB cover these rents? I really can't see how this company exists in face of Turbo Tax, and all the mortgage losses you think of.

      What am I missing?

      • 3 Replies to skier71
      • "I really can't see how this company exists in face of Turbo Tax...." skier71

        As cf says, you need to get "your thoughts more in line with "what is" rather than how you think things "should be."

        Commercial tax prep software has been around a long time. Block even has its own version, TaxCut. The fact is that 62% of taxpayers used paid preparers last year, up 2% from 2006. That's not an aberration. The numbers have been slowly but steadily increasing even though more people now have access to tax software and even Free File. The fact is that the IRC is extremely complex (last minute tinkering by Congress only adds to the confusion), people are strapped for time, and more and more are deciding it's quicker and much less stressful to pay a pro.

        While it may seem counter intuitive, Block's numbers seem to go up in times of high unemployment. Perhaps people just want their refunds faster, or maybe they're stumped by the tax consequences of unemployment comp, taking money from retirement plans, job search expenses, etc.

        I agree with too far, that prospects look good for the coming tax season. I could of course be wrong (not unusual). I could be VERY wrong if RALs are discontinued. Too far, you said your firm was notified that HSBC is discontinuing loan business with small firms. Block is not small! Don't they have a 5-year contract with HSBC that has a few years to go?

      • "In this credit crunch can HRB really access $1.7b?" (skier71)
        ---

        Yes, if it needs to.
        In case you missed it, last year at this time there was also a credit crunch. Block is much better off in this area than it was a year ago.
        =====

        "How can HRB cover these rents?"
        --

        The same way they have covered them for the past 50 years?
        Block recently had a major office expansion. Like any other company, it is likely that some of the less profitable locations will be closed, while some new offices will be opened in underserved locations.
        BTW, you should be aware that about 1/3 of Block offices are franchises, which means the company bears none of the costs of operating those offices. It's likely that Block will use franchises more in the future.
        ======

        "I really can't see how this company exists in face of Turbo Tax, ..."
        --

        Yet it still does. TurboTax has been around for a number of years and Block has not disappeared yet, nor does it look like that will happen anytime soon.
        ====

        "What is your understanding of HRB's exposure to additional required mortgage purchases? ... and all the mortgage losses you think of."
        ---

        The question of what will happen with the mortgages that OO sold or securitized is a valid one.
        The answer is that no one knows. The resolution of that question will likely take years.
        ====

        I'm not trying to paint a rosy picture of Block. It has a number of problems. But none are fatal.

        You ask "What am I missing?" The answer is getting your thougts more in line with "what is" rather than how you think things "should be." For example, instead of simply using guilt by association, pull out Block's 10K and look at the income from tax operations and then decide whether or not there are enough funds to keep all those offices open.

      • Correct me if I'm wrong but there is a much lower short interest in HRB than the average NYSE stock? - skier71

        Yes, short interest is lower. There have been periodic short squeezes that have burned the more aggressive shorts. Also with the infusion of cash from sales of the sub-prime mortgage operation and the brokerage Block has used cash from sales instead of borrowing money.
        ----
        In this credit crunch can HRB really access $1.7b? - skier71

        It was able to access two billion last fiscal year (ending April 30th) which it has since paid off. Your question is very perceptive, though. If the consortium providing the CLOC collapses, Block would have problems. In point of fact HSBC, which provides our firm (not Block) with financing facilities, notified us it was no longer offering tax refund products to small firms. Of course HSBC had to write down ninety billion dollars in bad sub-prime loans last year.
        ----
        Borrowing to pay dividends and borrowing for a stock repurchase plan insures that the insiders will get out and you'll be left holding the bag. - skier71

        Block has engaged in off season borrowing for around fifty years. The only difference now is that instead of the commercial paper market Block uses the CLOC.
        ----
        I see HRBs every where, more so than Krispy Kream or Starbucks (both of which are closing locations). How can HRB cover these rents? - skier71

        Again, another excellent question. Other than Texas, I don't believe Block is expanding very much. Block's major competitor is closing 119 locations, Intuit is laying off help. I feel that if upper management operates the tax offices in a more prudent manner and doesn't distract preparers with half baked programs next season will show incremental improvement compared to last year.
        ----
        I really can't see how this company exists in face of Turbo Tax, and all the mortgage losses you think of. - skier71

        Block gets new clients every year who first tried to self prepare their taxes. The mortgage losses are declining over time and will be shrinking drag on profits.
        ----
        What am I missing? - skier71

        The 2009 tax season will be profitable and will show additional growth now that money losing divisions have been discontinued. H & R Block is not a capital intensive business, except for the refund loans in January and February. Unless there are further developments, this crisis will pass leaving HRB intact.

        I do expect a cyclical drop into late October, then a recovery as tax season approaches.
        ----
        Thank you for your questions. Good luck tomorrow.

 
HRB
33.72-0.08(-0.24%)Dec 24 1:03 PMEST

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