H&R Block, Inc. (NYSE:HRB), the world's largest consumer tax services provider, dropped over 5% yesterday after announcing its financial results for the fiscal 2015 second quarter late Monday afternoon. The company typically reports negative earnings during non-tax season quarters, however, it missed both revenue and earnings estimates. A closer look at the release and management's outlook should help investors determine if this is an opportunity to buy on the dip, or if there are more serious issues with the company.
Second Quarter Results
Revenue for the second quarter of the fiscal year was $134.62M, increasing slightly by 0.2% year-over-year, but missing analysts' expectations by $7.37M. Additionally, the company reported non-GAAP, adjusted earnings loss per share from continuing operations of $0.45, also missing analysts' estimates by $0.03. Most importantly, the adjusted and actual EPS for Q2 both showed an increased loss compared to the same period y/y.
H&R Block's main business segment Tax Services, which makes up over 95% of total revenues for the company, grew 1% to $129 million. This was primarily driven by higher tax prep fees in the U.S. and Australia, and improved off season usage of the H&R Block Prepaid MasterCard, the Emerald Card. However, total operating expenses increased 6% due to higher D&A expenses from planned office and technology upgrades, as well as increased wages. This caused the segment's adjusted non-GAAP pretax loss to expand 13%.
Is Now The Time To Buy?
H&R Block earnings miss on the top and bottom line seems to have caused investors to sell off the stock. However, there was no new news concerning several key drivers of the stock, including the delay of the sale of its banking unit to BofI Federal Bank that would allow the company to exit Federal Reserve oversight. H&R Block typically posts negative earnings during non-tax season periods, so the wider loss shouldn't be a huge concern, and the company is coming off of a particularly strong performance in Q4 FY14. Revenue for Q4 was up 16.5% y/y, net earnings were up 37% y/y, and adjusted earnings were solidly above consensus estimates.
Furthermore, H&R Block is the leader in its space, as the largest tax preparer in the world, and filing one in every six tax returns in the US. This large footprint in a relatively fragmented industry gives the company a tremendous growth opportunity, especially as it expands its "plus" program to help DIY filers and as it positions itself to take advantage of increased tax preparation complexities resulting from healthcare reform. With the stock trading below 17x forward analysts' estimates for FY15, and its steady dividend payments, I think investors may want to take advantage of this pullback.
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