H&R Block has posed some headline risk lately. Though New York Attorney General Eliot Spitzer's increased attention to his gubernatorial campaign may have diminished the menace his name wields on Wall Street, Spitzer did cause H&R Block's stock to fall about 6% after he accused the company of gouging investors with undisclosed fees in its Express IRA retirement product. The lawsuit amount of $250 million is not financially crippling, but it remains worrying, since a service business depends largely on customers' trust in the brand. H&R Block's other woes include an ironic, embarrassing tax accounting error causing a restatement of earnings for the past couple of years, and other lawsuits regarding high-interest advances on tax refunds, "pay stub" loans, and similar products. This past Sunday, CEO Mark Ernst tried to take the high ground, calling on competitors such as Jackson Hewitt
As for recent results, H&R Block reported lackluster earnings last Wednesday. The numbers met analysts' expectations, but the company has already reduced guidance twice so far this year, because of the above accounting and legal issues, as well as flat results in its core tax-preparation business and weakness in its mortgage business. Combined, the two business segments account for about 80% of total revenue, and all of its profits. H&R Block's other three units collectively have negative earnings, though they are experiencing strong revenue growth. Most analysts expect the core tax business to improve, but the mortgage business remains a wild card, because of increasing mortgage rates and concerns about the bursting of potential housing bubbles on the East and West Coasts and in other U.S. markets.
So far, there's little to like, and it's hard to tell when things might improve. That translates into mostly "hold" and "sell" ratings from analysts primarily concerned with results over the next 12-18 months. But for farther-sighted Fools, the shares don't look so bad. They offer a 2.3% dividend yield, paying investors a bit to wait for things to improve. The valuation is also quite reasonable at 16 times trailing earnings; based on fiscal 2007 company guidance, it's even better -- between 11.5 and 13.
Granted, free cash flow has struggled lately, but the company has a history of throwing off large amounts of cash. Those funds have allowed it to increase its dividend for nine straight years, repurchasing a fair amount of shares along the way. Overall, revenue, earnings, and book value have grown at double-digit rates on average over the past three, five, and 10 years.
Currently, H&R Block's positive and negative aspects roughly balance out. But the negatives are largely short-term, since accounting restatements should be resolved soon. The larger legal and regulatory matters should also work themselves out, as should any mortgage market volatility. Plus, none of these problems are expected to ruin the company.
That leaves H&R Block with a strong track record, a decent dividend, and a highly profitable core tax business. The company's tax-prep services are expected to experience strong long-term growth as consumers increasingly turn to outside parties to prepare their taxes. As a case in point, peers Jackson Hewitt and Intuit
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