H&R Block Improves, but Threat of Disruption Remains

Tax-prep-service provider H&R Block (NYSE: HRB  ) has little intention of posting a positive fiscal-second-quarter-earnings figure because it's one of the most seasonal shops in town. Still, while investors and analysts expected a loss, this one came in worse than estimates, if a little better than last year's comparable quarter. The company has struggled with the divestiture of its savings and loan business -- a segment that management wants to leave behind for an easier regulatory environment. H&R Block's earnings miss shouldn't concern existing investors much, as it was a necessary charge for improving long-term prospects for the business, but investors should keep a close eye on competition, as this is yet another space that faces intense disruption.

Earnings recap
Revenue slipped slightly from 2012's $137.3 million to $134.3 million. Analysts wanted sales closer to $138 million. The company actually saw some compelling results for the traditionally weak quarter, including improved interest income from its various personal and small-business tax services. The overall drop in service revenue was due to timing -- not a drop in demand.

Margins looked a bit crunched, though, as operating expenses rose roughly 4% to $315 million based on higher marketing spending and some compensation benefits.

At the bottom end of the income statement, H&R Block lost $104.9 million -- $0.39 per share. This comes in as a negligible improvement from last year's loss (the same on a per-share basis), and a penny worse than analyst consensus for the quarter.

As H&R Block is able to put its banking segment into the rearview and arrange a partnership with a lender to enhance its business-services segment, earnings may become less lumpy and less wholly reliant on the first four months of the year. To go a step further, business services may be the future of the company.

Stiff competition
H&R Block's personal-tax-preparation services are far more expensive to provide than Web-based services such as Intuit's (NASDAQ: INTU  )  TurboTax and Blucora's (NASDAQ: BCOR  )  TaxAct products. Both have nailed down their respective markets -- higher- and low-end markets, respectively. H&R Block has its own Web-based tax preparer, but it's facing very difficult and well-established competition in the space. For this reason alone, investors should tread carefully into the stock.

H&R Block's service is priced similarly to TurboTax, while TaxAct offers a cheaper, slimmed-down version of the two. TurboTax is the leader in the segment, with an army of top reviews and arguably the best user experience.

At 13 times earnings, H&R Block is more expensive than Blucora, which has just as good if not better growth prospects. The former does, however, trade at a decent discount to Intuit's 18.6 times earnings. Still, with a threatened business model and fair valuation, H&R Block isn't an attractive buy today.

 

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