Given a sustained focus on expense reduction initiatives, increase in new client growth, effort to augment the company’s digital tax offerings as well as performance and termination of RAL Agreement, partially offset by high unemployment levels and a soft performing Business Services segment, we reiterate our Neutral recommendation on H&R Block Inc. (HRB).
H&R Block implemented a restructuring program to reduce workforce, cut down overhead expenses and increase operational efficiency. The company intends to realign its field and corporate support organization to save $100−$150 million by the end of fiscal 2012.
To augment the company’s digital tax offerings as well as performance, H&R Block inked a deal to acquire 2SS Holdings Inc, a developer of TaxACT digital tax preparation solutions. H&R Block estimated a $0.05 per share accretion to earnings for fiscal 2011. The addition of the TaxACT digital tax preparation solutions will also help the company to develop on its digital strategy going forward. However, the Department of Justice filed a civil antitrust lawsuit to block the proposed acquisition.
H&R Block remains focused to increase new client growth. The company expects changes to Emerald Advance program, a new free EZ tax professional sampling program, early-season bank settlement product offerings, a new marketing campaign, and competitor conversion program would help it draw new clients.
With the termination of H&R Block's RAL Agreement, the company can now enter into other contracts for financial products that were earlier barred. However, H&R Block believes that the termination would deprive taxpayers of credit compelling them to use higher-priced alternatives. The company is working on products to fill the gap created by the termination.
On the flip side, owing to high unemployment levels, the overall tax filing market is expected to remain under pressure.
Also, H&R Block’s Business Services segment is witnessing a decline in revenues over the past few years. A stressed capital market is weighing on revenues from core tax and accounting services.
H&R Block reported third quarter adjusted income of 14 cents per share, a stark improvement from the Zacks Consensus Estimate of a loss of 1 cent. It however lagged the year-ago results owing to lower revenue and higher expenses.
The quantitative Zacks #4 Rank (short-term Sell rating) for the company indicates downward pressure on the shares over the near term.
Headquartered in Kansas City, Missouri, H&R Block Inc. is a leading provider of tax preparation services. Through its subsidiaries, the company provides tax, retail banking, accounting and business consulting services and products in the U.S., Canada and Australia. It competes with Intuit Inc. (INTU).
BLOCK H & R (HRB): Free Stock Analysis Report
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