H&R Block's Taxing Supbrime Exposure

H&R Block (NYSE:HRB) had a pretty good year in its core tax preparation business, and several other segments also performed well. Too bad it lost close to a billion dollars on its mortgage unit, which thankfully will be sold off soon.

Block posted an earnings-per-share loss of $1.33 for all of FY 2007. That included a loss of $2.50 from Option One Mortgage, which is now considered a discontinued operation and should be sold off by November. This albatross of a division clearly offset positive results from the other business units, which grew sales 12% and earnings 26%.

The tax services unit boosted the top line by nearly 10%, and income close to 20%, as Block served more customers in its retail offices and grew market share online, better competing with cyberspace leader Intuit (NASDAQ:INTU). The business and consumer financial services divisions also posted top-line increases, but profitability trends remained uneven.

The problem at H&R Block has been that efforts to diversify out of its flagship tax preparation business haven't gone very well, to say the least. The sale of Option One will mark the end of a disastrous foray into the subprime mortgage market. And other endeavors to move into offering financial advice and banking services to clients have failed to match profit margins from the tax business, even though sales are moving in the right direction.

Fortunately, the mortgage debacle will soon be behind Block, and hopefully it will return to generating substantial cash flow to continue increasing its dividend and repurchasing shares. But as it stands currently, smaller rival Jackson Hewitt (NYSE:JTX) is a purer play on tax services, with plenty of real estate to cover and with new store branches. In other words, it's similar to the way H&R Block used to be, before it became too big in tax preparation services and stretched out into unrelated businesses to keep growth chugging along.                                

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Fool contributor Ryan Fuhrmann is long shares of Jackson Hewitt -- a Motley Fool Pay Dirt recommendation -- but has no financial interest in any other company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.