Top 3 Tax Season Plays
Tax season is in full swing, and the tax filing deadline just a little more than a month away.
Although it’s rather annoying for taxpayers, the beauty of the tax business is that taxes must be filed every year regardless of how the economy is doing. This makes the companies preparing tax returns and selling tax software steady businesses.
#-ad_banner-#Plus, with the U.S. economy strengthening there has been a steady rise in employment, which is increasing demand for tax-related companies.
But the industry has become more aggressive when it comes to attracting customers. The winners will be those that can offer the most value to customers, while keeping things relatively cheap and easy.
With that, there are a number of ways to use your portfolio to play tax season this year.
The DIY Play
Intuit (Nasdaq: INTU), parent company of TurboTax, is a big bet that people will continue to gravitate toward the do-it-yourself tax prep model.
The latest data from the Internal Revenue Service shows that self-prepared e-filings are up 3% so far in 2016. But TurboTax is seeing even bigger gains, with 9% growth in e-filings from this time last year. This means that TurboTax is stealing market share from other players.
Intuit recently started offering federal and state tax filings for free, which appears to be paying off nicely. By offering filings for free, Intuit is securing customers early on and betting they can charge them later in life as their returns become more complicated.
Intuit also has the advantage of offering convenience and ease, where it’s integrated brokerages and expense tracking sites to allow the importing of various data. And it’s also moving away from the software model to offering its services in the cloud, and on a subscription business. A similar and successful move that Adobe (Nasdaq: ADBE) has made. Intuit is also making a big bet on the tax market by selling off other personal finance businesses, including Demandforce and Quicken.
There could be another catalyst on the horizon for Intuit as well. A Donald Trump Presidency will be a big positive for Intuit and other do-it-yourself tax providers. Trump is pushing for a simpler tax code to help make tax preparation easier. A simpler tax return means that more people might opt to file their own taxes, which could be a boom for the likes of Intuit and Turbotax.
The Physical Play
H&R Block (NYSE: HRB), which has over 10,000 physical stores, is the best play if you’re betting on the fact that some people will still want to have face-to-face interactions. About 60% of tax filers still have their taxes prepared by someone, whether it be H&R Block or independent certified public accountant.
Still, H&R Block’s core business of in-person preparation declined in 2015. And already this year, assisted e-filings are down 5% year-over-year. But H&R Block’s relatively new desktop software and online return businesses are managing to grow.
Both H&R Block and Intuit are getting into the undercutting business, trying to take market share from each other by entering new markets and businesses.
H&R Block is taking aim at the small business market, where Intuit has been a leader with its QuickBooks brand. H&R Block has rolled out Block Advisors, which will provide tax, accounting and payroll services to small businesses.
Then there’s the fact that H&R Block is looking to tap into the do-it-yourself market with its H&R Block Deluxe software, which is similar to TurboTax. As Intuit and H&R Block jockey for position, will this open the door for a smaller player?
The Underrated Digital Play
Blucora (Nasdaq: BCOR) owns the TaxAct brand. This small company is the underdog. It did 5.5 million tax returns last year, making it the third largest online tax preparer in the United States. It generates just over $117 million in revenue, while Intuit’s tax-related business generates over $2 billion.
TaxAct still has an inherent advantage: it’s generally the cheapest option. But the market still thinks there’s a lot of risk, and investors have driven Blucora’s stock down 60% over the past year. TaxAct has just 150 employees compared to TurboTax’s 7,500. However, TaxAct has the advantage of being small and nimble, keeping costs low by running the company from Iowa.
Blucora is a transition story. The company is shutting down its Internet businesses, which includes e-commerce platforms and the search engine Infospace. At the same time, it recently spent over $500 million to buy a financial planning company — HD Vest Financial Services. The idea is that it can ultimately cross sell wealth management services to its tax filing clients.
Risks to Consider: One of the biggest risks is a fall in employment, which would decrease the number of individuals looking to file tax returns. As well, cybersecurity concerns may pressure online tax filing.
Action to Take: All the U.S. tax companies are greatdomestic plays, with no international exposure and currency risk, and having rising employment as a tailwind. But it’s a cutthroat business that’s getting more aggressive. Size and resources matter. H&R Block appears cheap, but it might be cheap for a reason — as it continues to lose market share to online filers. Blucora still has a lot of risk given its transitionary state. Intuit has the staying power and is becoming more of a pure play on the stable tax business — it’s the name to own in the space.
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