The New and Improved H&R Block: Management Takes Charge

Yesterday, September 3 after-hours, H&R Block Inc. (HRB) reported a Q1 ‘09 loss of $0.41 per share or $132.7 million on $339.6 million in revenue vs. a loss of $0.93 per share or $302.6 million on $381.2 million in revenue a year ago (see conference call transcript). Analysts expected a loss of $0.35 per share on $378.3 - $381.2 million in revenue, missing both earnings estimates and revenue targets. Tax Services increased 7.7% to $75.3 million vs. $69.9 million a year ago. Shares were down about 3.5% after-hours and the previous session’s close marked the highest that HRB’s stock traded at since November 23, 2005 when it hit $26.66. Shares should see some weakness in today’s morning trading. 

Revenue dropped 11% mostly due to the off tax season. Loss from continuing operations was $0.40 per share or $129.4 million vs. a loss of $0.34 per share a year ago, up 15%. Loss from discontinued operations was $3.4 million vs. a loss of $192.8 million a year ago due to ending operations in the subprime market. Income was offset by $20.4 million in loss reserves and write-downs at H&R Bank. The effects of the subprime crisis can still be seen as H&R Bank reported a loss of $14.1 million vs. earnings of $4.8 million a year ago.  

HRB’s improvement in the area of subprime exposure: In January 2008, H&R Bank held about $1.4 billion in loans, bought from Option One Mortgage (remember this one?). As a result, $28 million had to be set aside, leading to a Q2 2008 loss of $12 million. By the end of Q4 (the previous quarter), HRB’s mortgage balance was $966.3 million. By Q1 ’09, the balance was at $869 million and dropping. HRB expects to eliminate $200-400 million more within two years.  

HRB reiterated their fiscal 2009 guidance of $1.60 - $1.70 per share. Analysts are expecting $1.66 per share for the full year. HRB should do extremely well given that the reported Q1 loss was 56% less than the previous year, operations improved, and losses from discontinued operations related to subprime decreased significantly.  

HRB also announced their plan to purchase ‘Block Texas’, a group of companies operating HRB’s franchise units. The units are located in Texas, Oklahoma, and Arkansas. The acquisition, valued at $278 million cash, should add 760,000 additional clients as well as a nice revenue and earnings boost. The operators generated more than $140 million in revenue for fiscal 2008 and the deal itself will add $0.05 per share in fiscal 2009. The deal is scheduled to close by October 31.   

HRB made a number of improvements and changes over the past year. Obviously the subprime business was shut down and the mortgage servicing unit was sold in May 2008 to WL Ross & Co for $1.1 billion. In August 2008, the unprofitable securities business was sold to Ameriprise Financial for $315 million. HRB has positioned itself to weather this storm by shedding unprofitable businesses that are hurting HRB’s core business as the #1 U.S. tax preparer. The new CEO is taking action, and I like it. The industry outlook is neutral, but the company’s outlook is positive. 

Currently, 7 analyst publish recommendations for HRB with 3 “Buy” ratings, 3 Hold” ratings, and 1 “Sell” rating. Expect new and reiterated ratings to come out in the next few days. In the past six months, insiders purchased 4.43 million shares vs. sales of 134,422. I like the sponsorship.  

Technically, HRB broke out and has drifted up ever since. I expect some consolidation in this area. Support is at $24.10. 

Jackson Hewitt (JTX) is reporting pre-market this morning (9/4), so watch their earnings.

Disclosure: none