Wednesday, 27 April 2016

H&R Block Down 15% Today, Good to Cancel Order Hit at $20.48

Quick post on HRB.  Maybe I'm a sucker because I'm an accountant and I'm letting the nature of my work obscure my ability to objectively judge the characteristics of exceptionally good businesses.  Or, maybe, there is no such thing as an exceptionally good business, there are only good businesses that get bid-up stupidly as a result of perception (or expectation) of exceptional characteristics or get sold off stupidly as a result of perception (or expectation) of unexceptional characteristics.

As a retail nobody, managing my own money with no hidden agenda, I can only offer the following insights:
  • I want to be a buyer when I perceive a temporary rift between what I believe to be sustainable good business characteristics vs. public perception of a sustainable good business as lousy
  • My definition of good is characterized by my own analysis of normalized sustainable earnings power and free cash flow on an ongoing basis.  When good gets cheap enough, I have to find the courage to act.
  • My evaluation of a temporary situation does not resolve itself instantaneously.  Temporary can last a lot longer than any participant has the patience to deal with emotionally and psychologically.  I'm no exception.
  • Sometimes, a prevailing or overriding theme or belief motivates participants to make decisions which turn out to be irrational, but which make perfect sense in the moment.  With respect to HRB, I believe the current prevailing or overriding theme or belief is fear over the future impact of the proposed free tax preparation and filing bill...per Elizabeth Warren (link here).  Coupled with filing delays and overall decreases in filing stats, the result among participants seems to be sell first no questions asked.





On the subject of HRB's free cash flow and sustainable normalized earnings, I've been tracking HRB pretty regularly over the last month as it's shown up on my 52 week low list a number of times.

Here were my most recent thoughts from April 1 when it showed up on the 52 week lows:

















My notes to myself at the time:

"Almost cheap.  $18.60 = +15% MOS & 11% PT Cap rate"

What did I mean by this?

If, the price got down to $18.60, my estimate of sustainable free cash flows to the firm of $608M / 8% (no growth perpetually)  = $7.6B vs. EV at $18.60 of say, $6.5B, there would potentially be a situation whereby an investor can purchase a perpetual cash flow stream of $7.6B for $6.5B.  $7.6/6.5 - 1  = +17%.

Caveats to the above;

Is FCFF correct?  Is $608M sustainable?  Based on today's news of a further drop in tax filing, maybe $608M should be chopped in half?  I don't personally believe this much of an adjustment is necessary, but it's certainly within the realm of possible.  Maybe I should have modelled out $3.75B / .08 instead...in this case, I get a target EV of $4.7B vs. current EV of $6.76B.  Not great.

So how likely is $3.75B?  Here's the free cash flow over the last 22 years:






















Notes:


  • The above chart of FCF's (per gurufocus) encompasses all previous years whereby HRB included HRB bank and all bank related activity.  HRB today is a different entity than it was 20 years ago, and it's a different entity than it was 2 years ago
  • Gurufocus FCF is not FCFF.  My adjustment to FCF to get to FCFF includes an add back of after tax interest expense.  If current FCF is $500M, my adjustment for AT interest expense is $2.5B x 5% x .65 = $81M.  
  • Excluding 07/08 when HRB got directly hit by the subprime mortgage business, FCF's have increased steadily since the early 90's.  Is a baseline closer to $500M before after an tax interest adjustment reasonable?  I think so.

On the subject of having the courage to act.  I have to admit, if it's not obvious to any readers by now, I'm somewhat of a chartist.  I use long term charts to attempt to map out constructive entry and exit points. Often-times, I'm completely out to lunch and price deviates so much from what I expected based on charting, that I feel foolish.  Sometimes, everything ties together nicely.  Here's what I saw in HRB on a weekly and monthly basis (before today):

Monthly through April 26:

























And here's the monthly updated through today:

























What a difference a day makes!  Remember these are monthly charts!

I had a good to cancel order in for 50 shares at $20.48, thinking it might take a few months to get hit, and I'd strategically place the order just above the 100 month simple moving average.

Well, it got hit today, in for a penny, in for a pound.



2 comments:

  1. That would be the 100 DAY moving average, would it not?

    Always interesting to read your comments.
    Cheers,
    MG

    ReplyDelete
  2. Thanks for the comment! It's a monthly chart sir...that should be the 100 month MA...my fear is that I'm early and my analysis is too superficial. In the extreme, there seems to be t/l support at $12, so my risk is $-400 from here on my first piddly 1/2 board lot, which in the context of the overall assets is fine. Lots of time to think, digest & synthesize my purchase. I'm a fan of good to cancelled limit orders and I often have them in but don't suspect they're going to get hit...until they do.

    ReplyDelete