Earnings

A Side-by-side Analysis of H&R Block, Inc. (HRB) and Weight Watchers International, Inc. (WTW)

H&R Block, Inc. (NYSE:HRB) shares are up more than 12.88% this year and recently increased 3.47% or $0.87 to settle at $25.95. Weight Watchers International, Inc. (NYSE:WTW), on the other hand, is up 282.10% year to date as of 11/13/2017. It currently trades at $43.75 and has returned -2.34% during the past week.

H&R Block, Inc. (NYSE:HRB) and Weight Watchers International, Inc. (NYSE:WTW) are the two most active stocks in the Personal Services industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect HRB to grow earnings at a 10.00% annual rate over the next 5 years. Comparatively, WTW is expected to grow at a 15.00% annual rate. All else equal, WTW’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 30.08% for Weight Watchers International, Inc. (WTW). HRB’s ROI is 35.40% while WTW has a ROI of 23.20%. The interpretation is that HRB’s business generates a higher return on investment than WTW’s.

Cash Flow 




If there’s one thing investors care more about than earnings, it’s cash flow. HRB’s free cash flow (“FCF”) per share for the trailing twelve months was -2.27. Comparatively, WTW’s free cash flow per share was +1.19. On a percent-of-sales basis, HRB’s free cash flow was -15.63% while WTW converted 6.59% of its revenues into cash flow. This means that, for a given level of sales, WTW is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. HRB has a current ratio of 1.50 compared to 0.80 for WTW. This means that HRB can more easily cover its most immediate liabilities over the next twelve months.

Valuation

HRB trades at a forward P/E of 12.63, and a P/S of 1.80, compared to a forward P/E of 23.05, and a P/S of 2.32 for WTW. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. HRB is currently priced at a -4.49% to its one-year price target of 27.17. Comparatively, WTW is -28.28% relative to its price target of 61.00. This suggests that WTW is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 3.00 for HRB and 2.70 for WTW, which implies that analysts are more bullish on the outlook for HRB.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. HRB has a beta of 0.56 and WTW’s beta is 2.99. HRB’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. HRB has a short ratio of 10.82 compared to a short interest of 4.66 for WTW. This implies that the market is currently less bearish on the outlook for WTW.

Summary

Weight Watchers International, Inc. (NYSE:WTW) beats H&R Block, Inc. (NYSE:HRB) on a total of 8 of the 13 factors compared between the two stocks. WTW generates a higher return on investment, is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. WTW is more undervalued relative to its price target. Finally, WTW has better sentiment signals based on short interest.

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