H&R Block's Giant Loss Not a Problem, but Future Remains Foggy

The tax-prep giant saw its loss grow many times over this year as government shutdowns and delayed filings pushed much of the company's expected sales into the current quarter. While that shouldn't concern investors, other trends might.

Mar 7, 2014 at 5:24PM

For most, tax season is a particularly frustrating part of the year. But for H&R Block (NYSE:HRB), it's the four-month period where the company recoups eight months of losses. This current season is more important than most, as the company has posted five consecutive misses on analyst estimates and racked up a net loss of nearly $340 million. The weak top line stemmed from many people preparing their tax returns but not yet filing, as most wait to do so during the Jan.-April 15 period. Still, there are trends in the tax-prep industry that should concern H&R Block investors.

Delayed filings
With sales of just $200 million, 58% below the year-ago quarter's sales and a far cry from the average analyst estimate of $531 million, H&R Block's roughly $540 million in expenses brought the company deep into the red.

Tax preparers are used to seeing net losses in the eight months they aren't processing filings and returns, but this year was much worse than anticipated.

H&R Block posted a net loss of $338.2 million, or $0.77 per share. The year-ago quarterly loss was $0.21 per share, and analysts had been looking for a loss of only $0.09 per share.

Nothing in the just-ended quarter was good for investors, though the substantially lower sales figures are not indicative of any organic drop in demand. This was purely a matter of timing and people delaying their filings until this quarter. The deferred revenue will show up in the next earnings report and (hopefully) reverse the huge losses of the fiscal third quarter. Investors shouldn't worry much about the quarter, regardless of analyst estimates. There are other concerns, though, to keep in mind.

Tides of change
H&R Block does have considerable opportunities in the small- and medium-sized business categories. Companies with limited budgets that need basic accounting services will likely continue to recognize the value that H&R Block provides. Its consumer-level products, though, are a different story.

As technology has enabled online tax prep and filing, the ability for the average person to do their own taxes has increased substantially. Intuit's TurboTax is the consumer online tax-prep leader and offers a very refined, easy, and thorough user experience. On the low-end of the spectrum is Blucora's TaxAct software. With a focus on delivering a value-priced tax-prep service, TaxAct appeals to those who want the plain and simple file-and-return service.

Now, H&R Block does have its own Web-based tax-prep service, but it's in a very competitive environment. The higher-end market-share leader has a better product, and H&R Block's own product is priced very similarly.

At 15 times forward expected earnings, H&R Block is not priced as a company with significant competitive headwinds. Intuit at 20 times earnings is not a direct comparison as it is a software company first and foremost. Blucora, which owns TaxAct and a search business, trades at 7.2 times earnings though has had mixed results in the search game.

All in all, the tax-prep business seems to be OK in the foreseeable future, but there is not a compelling reason to buy.

More from The Motley Fool 
Social Security plays a key role in your financial security. In our brand-new free report, "Make Social Security Work Harder For You," our retirement experts give their insight on making the key decisions that will help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends Intuit. The Motley Fool owns shares of Intuit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers