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H&R Block Shares — 3 Pros, 3 Cons

Margins may be on the upswing

   

H&R Block (NYSE:HRB) usually posts losses until its tax-season quarter, and in its most recent fiscal second quarter, the company did indeed post a loss from continuing operations that widened to $123 million from continuing operations.

Wall Street showed some concern about the results as the loss of 41 cents a share missed analysts’ expectations. In Friday’s trading, H&R Block’s stock fell by more than 6%. (On Monday, the stock was essentially flat at $15.20.)

But what about the prospects going forward? Might the stock’s drop be an opportunity? Let’s take a look:

Pros

Great Brand. When it comes to tax preparation, H&R Block is certainly a trusted brand. The company also has an extensive distribution footprint, with 100,000 trained associates. Keep in mind that H&R Block recently renewed its partnership with Wal-Mart (NYSE:WMT), which will operate 300 offices in its stores.

H&R Block also has been investing in its digital business. Besides its At Home software, the company has also been getting aggressive with social media, such as with Facebook and Twitter.

Restructuring. With H&R Block’s strong cash flow, the company has expanded into other businesses over the years. The problem is that they have mostly been a bust. As a result, the company has been unloading these operations, recently selling its RSM McGladrey business tax segment for $575 million and closing out its ExpressTax business.

These moves should help provide more focus and energy on the core consumer tax business, which continues to be fairly attractive.

Buybacks. The company is definitely trying to find ways to boost the stock price. One approach is to repurchase shares. During the past quarter, the company bought back 4.3% of the outstanding shares, at an average of $13.61 each. About $1.2 billion remains under the repurchase program.

Cons

Subprime mortgages. Perhaps H&R Block’s most costly diversification was its Sand Canyon division. Because of the real estate meltdown, the business has been the target of various legal claims regarding its subprime mortgage business, which was discontinued in late 2007. In the latest quarter, H&R Block set aside an additional reserve of $20 million to handle the potential liabilities. This certainly spooked investors. Might there be more charges against earnings?

Competition. H&R Block must contend with thousands of independently owned tax preparation firms and accountants. But there are also several competitive retail chains, like Liberty, and the move to the Internet has been significant, as seen with the growth of Intuit’s (Nasdaq:INTU) TurboTax.

Economy. With high unemployment, there has been a growing segment of the population that has not been required to file returns or that may be looking for low-cost approaches.

Verdict

By getting back to its core focus, H&R Block has many opportunities. One promising area is its Prepaid Emerald MasterCard, which allows people to spend their refund. This should be a good way to enhance customer loyalty and generate recurring fees.

In addition, the U.S. tax system seems to get more and more complicated, and this means a high need for assistance of qualified professionals. Consider that even TurboTax recently introduced live chat with tax advisers.

For the most part, however, H&R Block’s restructuring should allow for higher margins, especially during the upcoming tax season. The pros outweigh the cons on the stock.

Tom Taulli runs the InvestorPlace blog “IPOPlaybook,” a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned stocks.

 

 


Article printed from InvestorPlace Media, http://investorplace.com/2011/12/hr-block-shares-3-pros-3-cons-2/.

©2014 InvestorPlace Media, LLC

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