Trump Tax Code Initiatives May Increase The Bear Case For H&R Block

Trump’s victory in the U.S. presidential election is a negative for H & R Block Inc (NYSE: HRB), and the new Refund Advance product spells greater risk to margins than was earlier anticipated, Morgan Stanley’s Thomas Allen said in a report. He downgraded the rating on the company form Overweight to Equal Weight, while reducing the price target from $26 to $25.

Although H&R Block’s volume growth would likely accelerate in FY 2017, the stock currently reflects “a more balanced” risk to return ratio, Allen mentioned.

Increased Risks

“We believe that the election outcome increases the medium-term bear case risk from tax code simplification and ACA (Affordable Care Act) reform, while removing a bull case driver of immigration amnesty,” Allen wrote.

Although an ACA repeal could take a few years to implement, it is a “cornerstone of Trump's candidacy” and would eliminate a tailwind that the industry has enjoyed for the past few years, the analyst noted. He added that the broader tax code/system simplification presents “another risk.”

H&R Block’s new Refund Advance product is a new loan product that enables early season filers to get their refunds quickly. While such products offered a tailwind initially, the benefit has diminished since the product has become more commonplace, Allen stated. He pointed out further that these loans are not priced as margin drivers, which spells incremental risks for H&R Block’s margins.

At last check, H&R Block was down 6.99 percent at $22.23.

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