(By Mani) H&R Block, Inc.
) is an attractive value story poised for 30 percent EPS growth in fiscal 2013, driven by its leadership position in the stable, US-focused tax preparation industry and cost reduction initiative.
Kansas City, Missouri based H&R Block is the largest storefront tax preparer in the U.S. It also offers digital do-it-yourself (DIY) tax preparation solutions.
The company gave very little color on its tax strategy on the fiscal 2013 tax season. However, it did announce it would be reducing the number of Sears locations from which it has historically operated, which is anticipated to be slightly accretive given expense reduction will likely net outweigh customer reduction.
In 2012, the company operated in 500 Sears stores, and expects to operate in 112 in 2013. It also expects to increase its footprint of Wal-Mart (NYSE:WMT) locations in 2013 from the 250 it operated in 2012.
H&R Block recently negotiated a new credit facility that affords it $1.5 billion expiring 2017.
"Importantly, the new agreement removes an onerous, inappropriate covenant attached to the prior facility that dictated HRB maintaining a minimum book value at the end of its quarters despite its strong seasonality profile," Oppenheimer analyst Scott Schneeberger wrote in a note to clients.
The new credit line has been replaced with more appropriate debt to EBITDA leverage and interest coverage covenants, which also afford more flexibility with regard to return of capital.
"The financial flexibility of the refinanced facility is a meaningful positive unrecognized in HRB's stock," Schneeberger said.
The new covenants require H&R Block to have a debt to EBITDA level below 3.5 times at each of first/second/fourth quarter-end and below 3.75 times at the end of the third quarter. The company has been well below such levels, averaging 1.5 times with a high of 2.55 times over the past ten quarters and finishing first quarter at 1.4 times.
Additionally, the new credit facility has a lower interest rate based on LIBOR, PRIME, and Servicing Fees.
Given its low borrowing cost and strong financial standing, the possibility continues to exist that the company may refinance its $600 million of notes coming due in January with a larger notes issuance as it's well positioned to increase its leverage moderately for even greater increased on-hand flexibility.
"Even if it doesn't choose to pursue that strategy, HRB's ability to repurchase its shares is greatly enhanced by the recent refinancing of the credit facility," Schneeberger noted.
For the first quarter ended July 31, 2012, the company reported a net loss of $107.4 million or 39 cents per share, compared to a net loss of $175.1 million or 57 cents per share for the year-ago quarter.
Excluding items, loss from continuing operations was $104.7 million or 38 cents per share, compared to a loss of $111.5 million or 37 cents per share in the first quarter of last year.
The company typically reports a first quarter operating loss due to the seasonality of its core U.S. tax business.
Total revenue for the first quarter declined 4 percent to $96.47 million. Tax services revenue for the quarter fell 1 percent to $90.3 million from $91.4 million a year earlier.
Analysts polled by Thomson Reuters expected the company to report a loss of 39cents per share on revenue of of $101.15 million for the first quarter.
Moreover, the company's cost reduction initiatives are expected to add $85 million to $100 million of pretax earnings in fiscal 2013, leading to earnings and margin expansion.
Shares of H&R Block remained flat year-to-date, and trades at 10 times over the Street's 2013 consensus estimate. It offers a dividend yield of 5 percent.