December is a sleepy season for Jackson Hewitt Tax Service (NYSE:JTX), but shares perked up by 6% to close out the week after Thursday's Q2 earnings news. Let's see if it's justified.
What news?
Q2 revenues dropped from last year's minuscule $5.6 million to this year's smaller-than-minuscule $5.1 million. Losses, however, held steady at $0.78 per share, net.
Hmm. Sounds bad.
Don't worry. It isn't. As Action Jackson advised in its report: "Jackson Hewitt has historically generated roughly 2% of its total annual revenues in each of its first two fiscal quarters due to the seasonal nature of the tax return preparation business." Just like rivals H&R Block (NYSE:HRB) and Intuit (NASDAQ:INTU), April's the big quarter for tax returns; December, not so much.
So, why even bother reporting (or writing about the report) at all? Well, the numbers may not be particularly instructive, but the text of the report is. Basically, we read Thursday's report to learn what Jackson expects to report in the more important fiscal third and fourth quarters of the year. To wit: New CEO Michael Yerington tells us that Jackson is "on track to accomplish ... new product development, new marketing programs, a more efficient cost structure ..."
Which seems to translate as follows:
- "new product development, new marketing programs" -- higher operating costs, as the company rolls out Magic Johnson as its new corporate spokesperson, but also perhaps higher revenues thanks to a new "early season line of credit product" (loans to taxpayers, extended against payout of their tax refunds).
- "more efficient cost structure" -- this one's pretty (intentionally?) vague, but Yerington appears to be promising improved operating margins, as the hoped-for higher revenues outweigh the cost of new product development and the new marketing campaign.
Will the new plan return Jackson to its historically robust operating margins in the upper 30s, or must the company make do with the "mere" mid-20s margin to which it was reduced last year? On this question hinges the buy thesis. Right now, analysts expect only 9% long-term growth out of the company -- pretty small potatoes relative to Jackson's 12.5 P/E. But if Jackson can return to its former glory, then that P/E will shrink quickly, and growth expectations will surge.
Come back in three months, or even better, six, and we'll see how well Jackson is putting its plans into Action.
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