Turbo Tax Leaving H&R Block in the DIY Dust

 | Sep 02, 2016 | 3:36 PM EDT
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Ben Franklin once said, "In this world nothing can be said to be certain, except death and taxes." That comment has rung true more than 200 years later, and for that reason, tax preparers like H&R Block  (HRB) have been immune to many of the headwinds and disruptions other industries face.

Until now. 

Do-it-yourself (DIY) tax preparation is where the industry's growth is headed, and while H&R Block does offer that service, rival Intuit  (INTU) was early in its adoption and promotion of the service. Intuit was able to make its Turbo Tax DIY platform synonymous with the self-preparation of taxes. 

Block expects the industrywide DIY segment to grow 4%, compared to total industry growth between 1% and 2% and assisted tax prep growth between zero and 1%.

From its inception in 1983, Intuit's vision for its business was that the computer would continue to replace paper and pencil accounting practices. That bit of foresight has carried the company over the past three decades, culminating in Intuit currently trading at an all-time high above $110 per share. H&R Block's stock also reached an all-time high in October last year, but has since fallen 42%. 

This week's earnings report certainly did not help matters. Outside of tax season, tax preparers take in less money (for HRB this previous quarter was 5% of expected revenue vs. 15% of expected expenses for the fiscal year), and while the company's results were in line with its expectations, it missed Wall Street's guidance for the period. Revenue for the period was down $12.5 million to $125.2 million, short of $132.8 million expectations. 

The company, and most news outlets, pinned that miss on H&R's divestiture of H&R Block Bank. But the company also mentioned the loss of investment income and lower U.S. tax return volume as having negative affects on its top-line results. 

H&R Block understands the need to further tap into the DIY segment. "We will be aggressively going after clients in both the assisted and the DIY categories," CEO Bill Cobb said during the company's earnings call. 

Meanwhile, Intuit is also focusing on customer growth to boost revenue without increasing prices. The company's Turbo Tax segment saw 15% growth in the just-concluded quarter. Intuit is also more than just a tax preparation company, it offers accounting software for small businesses, diversity that gives it another leg up over H&R Block.

"For the fiscal year, consumer tax revenue grew 10%, with Turbo Tax online units growing 15% and total Turbo Tax unit growing 12%," CEO Brad Smith said during the company's latest earnings call. "We've performed extremely well this past year, introducing two dozen innovations in Turbo Tax, which helped expand the do-it-yourself software category while increasing our share in the category as well."

Bipartisan political calls for a simplification of the tax code could spell even more trouble for H&R Block over the long term as a simpler code will certainly push more people to do their taxes themselves. That is an eventuality that Intuit's brain trust welcomes. 

"We are big supporters of tax simplification. That's the business we're in," Smith said during the call. "At the end of the day we want to make sure we're helping people keep their hard-earned dollars in their pocket."

DIY is the way of the future, and Intuit has that side of the business in a stranglehold. If H&R Block can't figure a way to loosen Turbo Tax's grip on that side of the market, then Intuit is definitely the growth stock to own. 

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