H&R Block shares fall after missing expectations

Shares of tax preparer H&R Block Inc. retreated Thursday after the company more than halved its first-quarter loss on improvements in its tax services business but still missed Wall Street expectations, due to continued losses in its consumer financial services division.

Shares, which hit a new 52-week high of $26.66 on Wednesday, fell $2.57, or 9.7 percent, to $23.93 on Thursday. The share losses also come as weak retail sales and disappointing jobs data drove the broader markets lower, with the Dow Jones Industrial average freefalling 344.65, or 2.99 percent, to end at 11,188.23.

Late Wednesday, the nation's largest tax preparer reported more losses in its H&R Block Bank unit, writing down another $20.4 million in the three months ended July 31 due to difficult conditions in the housing and financial markets. While total quarterly losses narrowed sharply to $132.7 million, or 41 cents per share, from $302.6 million, or 93 cents per share, a year ago, both adjusted losses and revenue missed Wall Street expectations.

But the company has recently shed some underperforming businesses including its Option One Mortgage Corp. mortgage servicing business, and H&R Block Financial Advisors, its money-losing securities brokerage business. And Wednesday H&R Block agreed to buy the operator of its franchise units in Texas, Oklahoma and Arkansas, which it said will allow it to charge much higher royalty rates in the region.

Some analysts believe the changes bode well for the company in 2009 as it moves toward a focus on its core tax preparation business.

Michael Millman, a research partner with Soleil Securities Group Inc., said in a note to investors Thursday that purchasing the Texas-based franchisee will be important to the company's tax business growth. He backed a "Buy" rating on the stock and lifted his price target to $31 from $28.

Oppenheimer and Co. analyst Scott Schneeberger said Block's core tax business remains well positioned for seasonally strong second quarter and its $125 million cost reduction initiative is also tracking well.

In a note to investors Schneeberger reiterated an "Outperform" rating on the stock, saying the company missed Wall Street expectations mainly because it boosted loan loss reserves at H&R Block Bank, "which reflects H&R Block appearing (appropriately) conservative in light of the current market environment."

He said the company's momentum remains strong, its franchisee acquisition should offset the bank loss reserve and suggested any sell-off on the quarterly miss creates a buying opportunity for investors.