Look, Ma, No Tax Blunder

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Who said that being No. 2 can't be any fun? Jackson Hewitt Tax Service (NYSE: JTX) posted earnings this morning, and growth was strong on the top and bottom lines. There was no admission that the company understated its taxes the way rival H&R Block (NYSE: HRB) did. Yes, Jackson Hewitt should be more than happy to be the country's second-largest tax-preparation specialist this morning.

Even though the seasonally potent April quarter is currently under way, the company scored well in its January quarter. Revenues rose by 30% to hit $95.2 million, while earnings soared 50% higher to $0.69 a share. Analysts were pretty much clueless on this one, expecting profits to clock in at just $0.58 a share on $84.6 million in revenues.

Jackson Hewitt keeps growing. If you've seen a new office open nearby, you're not alone. Over the past year, 566 new Jackson Hewitt tax offices have sprung up, for a total of more than 6,000 mostly franchised locations.

The growth may surprise those who figured that folks were increasingly feeding their W-2s into online preparation sites and popular software by Motley Fool Inside Value pick Intuit (Nasdaq: INTU) and H&R Block. Jackson Hewitt's growing presence, and the popularity of advance loans for taxpayers who don't want to wait for the IRS to send out their refunds, have helped the company remain relevant. H&R Block's tax blunder may also have helped to strengthen the brand and reputation of its smaller rival.

Jackson Hewitt's fiscal 2006 ends in April, and it's going to be a good one. The company expects to earn between $1.51 and $1.56 per share. With the buoyant shares opening at $30 this morning, Jackson Hewitt is priced at 19 to 20 times this year's bottom line.

That may seem steep, relatively speaking. H&R Block guided investors to expect earnings between $1.65 and $1.85 a share in fiscal 2006. That prices the market leader's stock at just 12 to 14 times earnings.

Then again, Jackson Hewitt is growing much faster, and it doesn't have to shake an embarrassing blunder like H&R Block's. The cynic in me believes that Jackson Hewitt may be vulnerable to things like simplified tax codes and the trend of more folks trusting their own tax-preparation abilities. But the critic in me is willing to look beyond that for now, given the company's spectacular growth.

It's a taxing dilemma, but I'll trust Jackson's numbers before my own bearish hunches on this one. Nice quarter, indeed.

Are you getting your 2005 tax return in order? Check out our Tax Center to get up to speed.

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Longtime Fool contributor Rick Munarriz forks over his taxes gladly. However, he does not own shares in any company mentioned in this story. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.