By now you are certainly aware of the loss that 74-time Jeopardy! champion Ken Jennings suffered when the game show aired Tuesday night. The Final Jeopardy! answer that did the baby-faced trivia assassin in asked the contestants to name the company that fit this description: "Most of this firm's 70,000 seasonal white-collar employees work only four months a year."
Jennings -- who, by the way, had gotten more than 91% of all of the questions he had answered over 75 shows correct -- struggled, and finally wrote down FedEx (NYSE: FDX). The answer was tax preparation giant H&R Block (NYSE: HRB), and Nancy Zerg, his opponent, got it right. The Ventura real estate agent vanquished the most famous game show contestant since Charles Van Doren. And with that, suddenly Jennings' $2.5 million streak was over. That the game was in question at Final Jeopardy! was in itself an accomplishment -- in 65 of the previous 74 games, it was mathematically impossible for Jennings to lose, even if he got the final question wrong (which he did only 31% of the time).
It occurred to many people just how amazing a marketing windfall this was for H&R Block, including the folks at H&R Block. Block immediately offered Jennings free tax preparation services for life.
Here's the other thing about H&R Block, though. It's not so much that the question created so much interest in the company; what interests me is that H&R Block is so dominant in the tax preparation business that it could have been an obvious answer to a Final Jeopardy! question in the first place. There are other tax prep companies, including Jackson Hewitt (NYSE: JTX), but H&R Block is far and away the largest.
Tax preparation isn't likely to be a business that investors would get that excited about -- but the performance and potential at Block suggests that they should. This is an extremely sustainable, profitable business. Warren Buffett snapped up 8% of the company for Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) in 2000, noting that Block has what he considered to be an ironclad franchise. Since then, Block's management has bought back heaps of shares -- 8% of total outstanding in the last year alone -- boosting the Berkshire stake to 9%.
This is a company with simply amazing economics. I learned recently on the Fool discussion boards that the H&R Block franchise was essentially started by accident. The Block brothers provided all sorts of services to businesses in the Kansas City area in the 1950s, including tax preparation. They were determined to get out of the tax prep business, as it was taking too much time from their other endeavors. One customer suggested that they try to make a business just out of tax prep before they abandoned it entirely, so they ran an ad, and suddenly found themselves overwhelmed with customers. Soon after, they jettisoned every other business and focused on tax prep. The company has recently branched out into mortgage origination and retail stock brokerage. The latter component, in my view, is out of step with the remainder of the business.
Winner Nancy Zerg offers her own brilliant marketing angle. What a boon she would have been for Disney (NYSE: DIS), which is getting ready to produce Toy Story 3 -- this time without Pixar (Nasdaq: PIXR). Zurg is Buzz Lightyear's nemesis, and how great that another Zerg vanquished a hero on Jeopardy!, which runs in many markets on ABC, another Disney division. Man, you just can't make this stuff up! Beat logic to within an inch of its life, yes. But invent it? Never!
Jennings' run was good for Disney as well -- Jeopardy!'s ratings were 22% higher this year than last year due to the extreme interest in his streak.
Bill Mann
owns shares of Walt Disney Company and Berkshire Hathaway. His own Jeopardy! career ended at tryouts when he biffed on the question "What state capital has the most syllables in its name?"
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