Liberty Tax the Value in Tax Preparation

The old truism states that death and taxes are the only two certainties in this world. Not surprisingly that has many people wondering if income-tax preparation services; such as Liberty Tax (NASDAQ: TAX), are a value investment.

After all income taxes are not going away anytime soon and Americans have more incentive than ever to pay them because of Obamacare. The misnamed Affordable Care Act requires all U.S. residents to have health insurance and imposes an income tax penalty if they do not.

The number of potential customers for services like Liberty is also growing. The IRS estimated that 253.6 million American tax returns will be filed in 2016, a 13.2 million increase over 2010 when 240.4 million returns were filed. Around 8.3% of them; or 21 million people, will use a brick and mortar tax preparer Go Banking Rates reported.

There are some other value characteristics including the fact that Liberty is not a very sexy business. After all it operates 4,000 franchises that prepare taxes in strip malls and low-rent neighborhoods. That’s not a very glamourous business model, which will attract investors seeking hidden value.

17cityroom-tax-superjumbo

Is Liberty Tax Making Money?

Since income taxes are due every year this gives Liberty a steady business, but is it making any money? More importantly, are the tax returns actually generating any float?

The answer provided by the financial returns from July 31, 2016, is that Liberty makes a little money. There is growing revenue but very little float at Liberty Tax. Some highlights of Liberty’s business I found on ycharts include:

  • $173.06 million in revenues.

screen-shot-2015-12-09-at-12-55-43-pm-e1449684085669

  • $18.53 million in net income.

 

  • A free cash flow of -$25.28 million.

 

  • A profit margin of -131.9%.

liberty-tax-service

  • Assets of $190.29 million.

 

  • Cash and short-term investments of $4.882 million.

 

  • $1.922 million in cash from financing.

 

  • $23.35 million in cash from operations.
Liberty Tax is also in Canada.
Liberty Tax is also in Canada.

I imagine the insane profit margin is because Liberty only operates for a few months out of the year. Tax season in the United States lasts from January to April. That also explains the negative free cash flow; Liberty has to operate for several months out of the year with no customers.

The low level of assets and limited cash and short-term investments come from the fact Liberty is a franchise operation. Its real estate and infrastructure is almost entirely owned or leased by franchises. The company’s actually property consists of its brand and intellectual properties.

All of this makes for a risky investment but a very cheap one; Liberty was trading at $12.83 a share on September 23, 2016. It also had a market capitalization of $165.46 million and an enterprise value of $213.22 million on the same day.

Liberty Tax is an Interesting Income Investment

Despite all that Liberty is a decent income investment because it rewarded investors with a return on equity of 20.34% on July 30, 2016. Liberty also gave shareholders a dividend yield of 4.99% on September 23, 2016.

Investors are scheduled to receive a dividend of 16¢ on October 12, 2016. More importantly Liberty has paid a steady dividend of 16¢ every quarter for the past year and a half. That is not long but it is sort of impressive.

53660f48-9fdb-4993-9bcf-3d3b1ab268dd-w640

If you are looking for a cheap dividend stock with growth potential Liberty is a great choice. It is not the most respectable of companies; or the most stable, but it does make some money.

Something that investors should remember here is that not everybody will do taxes on line. Around 13% of Americans or 41.95 million people still do not use the internet according to the Pew Research Center.

Even they don’t use the internet those people still have to pay taxes. Since those people are often poorly educated they will have trouble with their taxes and need help. Many of them will end up turning to companies like Liberty because they lack the sophistication or education to do their own taxes.

That means companies like Liberty and H&R Block (NYSE: HRB) will have lots of potential customers for years to come. All that makes tax preparers a really fascinating contrarian play that value investors should look into.