We've been asking ourselves recently if the market has placed a fair valuation on H&R Block. Let's dive into some of the fundamental values of this mid-cap Consumer Discretionary company to determine if there might be an opportunity here for value-minded investors.
H&R Block, Inc., through its subsidiaries, provides assisted income tax return preparation and do-it-yourself (DIY) tax return preparation services and products to the general public primarily in the United States, Canada, and Australia. The company belongs to the Consumer Discretionary sector, which has an average price to earnings (P/E) ratio of 22.33. In contrast, H&R Block has a trailing 12 month P/E ratio of 12.6 based on its earnings per share of $2.71.
There is an important limit on the usefulness of P/E ratios. Since the P/E ratio is the share price divided by earnings per share, the ratio is determined partially by market sentiment on the stock. Sometimes a negative sentiment translates to a lower market price and therefore a lower P/E ratio -- and there might be good reasons for this negative sentiment.
One of the main reasons not to blindly invest in a company with a low P/E ratio is that it might have low growth expectations. Low growth correlates with low stock performance, so it's useful to factor growth into the valuation process. One of the easiest ways to do this is to divide the company's P/E ratio by its expected growth rate, which results in the price to earnings growth, or PEG ratio.
