It was recently revealed that Warren Buffett's Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) trimmed some of its stake in the long-term holding of H&R Block (NYSE: HRB). Has Berkshire thrown in the towel on the tax advisor?
Few Fools would blame him if it did, but because of Berkshire's investment clout, the SEC allows it to delay submitting its holdings while it's in the process of building or selling positions. As a result, we don't know the Oracle's intentions other than that he took some profits on H&R Block. Maybe Berkshire did sell the position, but we won't know for sure until later this year. That's OK because doing one's own tire-kicking is a better way to go when investigating companies and stock ideas.
I keep wondering what H&R Block would look like if it hadn't decided to diversify out of its core tax-preparation business. As far as I can tell, moving into other financial and business services such as insurance, brokerage, consulting, and payroll services has only served to distract the company from fending off savvy competitors in Jackson Hewitt (NYSE: JTX) and Intuit (Nasdaq: INTU).
The worst move may have been to move into the subprime mortgage business, currently the most despised industry in the market. Block's Option One mortgage division led to a loss for the fiscal 2007 third-quarter results released Friday, and management has had enough: It's trying to sell the unit and considers it a discontinued operation.
Granted, things aren't as grim as the panic hitting purer subprime players such as Novastar Financial (NYSE: NFI), which happens to also operate out of Kansas City, or Accredited Home Lenders (Nasdaq: LEND). These unlucky souls are seeing their stocks implode from worries over default trends from consumers with already-weak credit profiles. Fortunately, Block expects to unload Option One within the next month for close to book value, but the entire debacle has clearly tested investor patience.
Even with the bonehead business diversification moves, H&R Block generates solid cash flow and has low levels of capex, as its service businesses require little capital. Maybe the removal of Option One marks the return to more consistent profitability. Additionally, tax season has officially started, as has Block's opportunity to show investors it's fully prepared and can grow just as fast as its smaller, nimbler competitors. I'll take a wait-and-see approach, but if the stock falls under $20, I may be tempted to give H&R Block a further look.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
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