We are short shares of BOFI. Please click here to read full disclosures.
- BOFI’s recently announced, widely expected acquisition of H&R Block’s bank deposits boosts its earnings but does not address the long-term pressures that will drive down the company’s currently inflated profitability. At almost 4x book value, as we have previously argued, BOFI’s super-premium valuation remains unwarranted.
- At least five serious bidders besides BOFI vetted the H&R Block transaction, yet BOFI emerged as the winner despite a complete lack of cost synergies. We question how valuable an asset the H&R Block business can be when no one was willing to pay a single dollar for it.
- One of BOFI’s responsibilities under the new agreement is to serve as the issuing bank for H&R Block’s prepaid debit card. Looking at the two major issuing banks already operating in this space supports our concerns about BOFI’s high valuation and unsustainable earnings: they trade at half of BOFI’s price-to-tangible-book-value multiple, generate 35% lower net interest margins, and earn almost 50% lower returns on equity. In a highly competitive market in which BOFI has little experience, its returns should be weaker than those of the leading players. This peer comparison again highlights the fact that BOFI is over-earning and will suffer long-term deterioration in its NIM and ROE…