H&R Block Is Speeding Towards a Brick Wall

H&R (HRB) announced some difficult news today. They indicated that the Q1 loss ballooned as it struggled with its mortgage-lending arm and said it is trying to renegotiate the sale of the unit. Really!

If you have been following the tone and nuance of their recent press releases, you would become suspicious. First, they announce that they will amputate their problem and sell the offending mortgage unit with the sub-prime blemish to Cerberus. The deal is to close later this year and is subject to certain closing conditions.

They later announce a dividend (see my post June 7, 2007) designed to bribe dividend-seeking investors to stay with the stock. The timing of the dividend in my mind was suspect, as it was to be off record and paid roughly during the closing time frames. They then announce poor operating results several weeks after announcing the dividend. Always a cart-in-front-of-the-horse scenario.

Now a week before the annual general meeting, where we will have credible shareholder activists attempting to secure board seats, they announce poor results yet again. This time, they let it be known that they are attempting to renegotiate the sale terms with Cerberus.

In what case would Cerberus change the deal? Only if they receive an advantage. One of the conditions H&R wants waived is the condition to have any mortgage commitments for sixty days forward to be fully funded. This signals H&R is struggling very hard. All that Cerberus needs do is wait for the deal to fall apart and then laugh.

If Home Depot had to cut the price and guarantee debt on the sale of their problem wholesale division, H&R can easily be looking at different terms. The gun pointed at H&R's head is larger caliber. Unfortunately, H&R chambered the bullets in many cases.

H&R probably saw this one coming and was starting to twist in the wind. We need new management.

Comments

[NYUGradMatt:]

Dear George Gutowski,

Now that Cerberus has 100% walked away from Option One, what are your current thoughts on HR Block?

Thank you

2007 Dec 09 04:02 PM

[George Guto...:]

This company is in the repair shop. The new power at the top has integrity but the cure may be very painful. While there was a lot of focus on the mortgage market the whole tax preparation function was not firing on all cylinders. The situation is too unclear at the present and there are other situations which will present a more compelling picture. Check back with this stock after the patient is out of the operation room and assess if the amputations and transplants will take hold.

2007 Dec 21 10:56 AM