H&R Block Slides After Analyst Says Sell On Trump Outlook
Shares of H&R Block (HRB) are slipping after BTIG analyst Mark Palmer downgraded the stock to Sell on increased fears that a potential Donald Trump's simplified tax code may undermine the company's purpose. Earlier this month, his peer at Morgan Stanley had also cut his rating on the stock, citing similar concerns.
TAX CODE SIMPLIFICATION: BTIG's Palmer downgraded H&R Block to Sell from Neutral, with an $18 price target, saying that Donald Trump's policies could undermine the company's purpose. In a research note this morning, the analyst told investors that the President-elect said in August 2015 that "it would be a dream of mine to put H&R Block right out of business" by simplifying the tax filing process to the extent that the company's tax preparation services would no longer be in demand. While acknowledging that much of the rhetoric offered up on the campaign trail is unlikely to translate into policy, Palmer pointed out that the likelihood of the enactment of legislation that would simplify tax filing in a manner that could reduce the need for the company's tax preparation services has "increased significantly" given the Republican control of the White House and both houses of Congress. Further, the analyst added that on the Democrat side Senator Elizabeth Warren introduced last April the Tax Simplification Act of 2016 demonstrating the bipartisan appeal of such an approach. At the very least, tax simplification could accelerate the shift to online filing, a business line featuring thinner margins for H&R Block and one in which the company has been losing market share to Intuit's (INTU) TurboTax, Palmer argued.
ELECTION RISK: Two weeks ago, Morgan Stanley analyst Thomas Allen downgraded H&R Block to Equal Weight from Overweight on similar concerns, saying he views the election outcome as a negative as it increases the risk of a simplified tax code, while the potential repeal of the Affordable Care Act removes an industry tailwind. Additionally, the analyst said he sees risk to margins from Refund Advances as the benefits seem to have diminished and are more commonplace. The loans are priced as customer acquisition tools rather than margin drivers, he added.
WHAT'S NOTABLE: While speaking at the Economic Club of New York in September, Donald Trump said H&R Block "would be a disaster" under his presidency. The now President-elect was responding to a question about what industries would benefit from his economic policies. He spoke of his simpler tax plan as being a "disaster" for H&R Block.
PRICE ACTION: In morning trading, shares of H&R Block have dropped over 5% to $22.76.
Disclosure: None