H&R Block Rebuttal
by Bill Barker ([email protected])

Let’s talk valuation. I couldn’t help but notice that in his growth rate numbers, Louis ignored the First Call analyst numbers for the company specifically (15%), but adopted the projected industry growth rate (25%) instead. Then again, he certainly noticed that I did just the opposite, and any outside readers probably noticed what each of us was doing. Normally I wouldn’t be so quick to be accommodating, but why don’t we just split the difference here, and go with a 20% rate for the sake of simplicity? (As my fellow Fool notes, the very latest tax prep revenue figures show an increase of only 17% in the first two months of this, the first and most confusing year for the new tax code. And again, the analysts themselves predict only 15% growth for the company and, of course, the company hasn’t really been growing earnings per share at all, so I think I’m being exceedingly generous with 20% over five years based on the real data.)

Phew! Anyway, in that event, the YPEG fair value 12 months out is a max of $42, about 12% below the price the market is offering today, but, hey, it’s just money. And time.

I can tell that Louis won't be satisfied with such a mundane valuation method, which even adopting the most bullish set of facts can’t produce an attractive stock price prediction, because he proposes thinking about a mythical takeover:

“Cendant was willing to pay $480 million for [rival tax preparer] Jackson Hewitt. That’s $480 per customer or 13.8 times sales... Based on Cendant’s bid for Jackson Hewitt, Block might be valued at between $7.5 and $16.7 billion... that would be a stock price between $83 and $186.”

Indeed, it is a strange world (and an even stranger market) of infinite possibilities, so I suppose Block might be valued at $16.7 billion -- and if so, Louis has now provided me with better tax preparation advice than H&R Block ever could. Because the day when anybody sees a mature company that doesn’t grow earnings, is dependent on glorified check cashing scams like the Refund Anticipation Loan program for growth, and can’t seem to make a buck on any of the investments from its cash flow -- when somebody sees that and decides to buy that company for 96 times earnings is the day my taxes become real easy. All those vexing, “Should I incur capital gains?” decisions will be made for me, because without question on the day that such valuations are ever adopted by the market, that’s the day I go all cash.

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