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H&R Block Bear Case Scenario for Tax Prepartion Services $HRB, $INTU

H&R Block is about to release earnings. Ponder the Bear Case Scenario with these issues.

Tax Prep services are branded commodities based on what the IRS has decided is the tax code. The question is scalability because the tax return follows the same rules as set out by the IRS. The software update is one big fixed cost so you want to sell as many copies as possible.

Basically this is a financial brand company who wants to sell huge quantities of the same product.

What’s preventing it. There are only so many tax payers who will need to file. In some countries such as Canada and Australia the markets are very small compared to America so scalability works against H&R.

The product is subject to price competition which is only a mug’s game in both the short and long run.

A big part of the offering is guaranteed returns and then offering loans against the return. This is low brow lending to the higher risk desperate wage earner. Not a growth business.

Higher net worth clients are using the service through accountants or other tax preparers who are also doing financial planning. When these financial advisors get big enough they will buy in bulk and lower margins or develop their own software and bypass H&R Block.

Growth is not exciting when considered in this light.

George Gutowski writes from a caveat emptor perspective.