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 Fridays trading, H&R Blocks
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? Lets 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 Blocks 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 Blocks 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 Intuits (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 Blocks 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.
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