We are upgrading H&R Block Inc. (HRB) to Outperform from Neutral as the company reported a lower-than-expected loss in the quarter besides divesting RSM McGladrey to augment the performance of its core tax business.
In a concerted effort to augment the performance of its core tax business, H&R Block Inc. has decided to divest RSM McGladrey to McGladrey & Pullen, LLP for a consideration of $610 million. RSM McGladrey has not been able to post a revenue growth over the past few quarters.
In fiscal 2011, revenue from the unit declined approximately 6% from 2010. As such, the company has decided to vend off RSM McGladrey and we believe that this move will be accretive to the company’s long-term ROE and overall margin. Pretax margin at Tax Services was 27% while it was only 6% at RSM McGladrey in fiscal 2011.
H&R Block has a sustained focus on expense-reduction initiatives, which helped the company to report better-than-expected earnings in the past few quarters and has resulted in additional savings for reinvestment in new initiatives. The company expects realigning its field and corporate support organization to save $100−$150 million by the end of fiscal 2012.
H&R Block remains focused on returning value to its shareholders. The company pays an annual dividend of $0.60 per share, implying a yield of about 4.26%, significantly higher than the industry average of 1.92%. The company also actively manages its capital via share buybacks. In fiscal 2011, the company spent $280 million to buy back 19 million shares.
On the flip side, with the continuation of a stressed economic environment and a rise in unemployment levels, the overall tax filing market is expected to remain under pressure. Also, there is a continued shift from assisted tax preparation to the do-it-yourself mode, which is primarily driven by the growth in online tax filing.
The Zacks Consensus Estimate for fiscal second-quarter 2012 is a loss of 35 cents per share. For fiscal years 2012 and 2013, the Zacks Consensus Estimates are, respectively, $1.55 per share and $1.76 per share.
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. The company competes with Intuit Inc. (INTU).
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