H&R Block (NYSE:HRB) can't wait for tax season. The company's mortgage-services unit is sticking out like a sore thumb since tax-related revenue is at a minimum during the slow part of the season.
Bottom-line results are usually negative during H&R Block's first two fiscal quarters of the year, but the second-quarter loss in earnings, which were reported last night after the market closed, nearly doubled as the mortgage business slipped into the red after a profit in last year's quarter.
Fortunately for H&R Block, management announced earlier in the month that it was exploring strategic options, which may include an outright sale, on its Option One Mortgage segment. In the meantime, the company is closing and consolidating Option One offices to minimize further downside as the mortgage market cools from its recent overheated status.
When the company's mortgage unit issues subside, investors hope that H&R Block will be able to revitalize flagging tax-preparation growth that forms the bulk of total revenue and throws off prodigious amounts of cash flow. Rival Jackson Hewitt (NYSE:JTX) mirrors H&R Block in its heyday, when organic expansion opportunities were plentiful and it was able to easily take market share from the very fragmented tax-service industry and local mom-and-pop operators.
Having come to control an estimated 20% of the tax-filing marketplace, H&R Block has found growth harder to come by in recent years. The company has diversified into other businesses to keep growth chugging along, but decent top-line expansion has not resulted in robust cash flow generation as intended.
Management is throwing in the towel on mortgages, but it still has business-consulting services and consumer financial-services units to go along with the core tax-services segment. And while total company operating cash flow has been erratic, it is still substantial and allows for steady share repurchases and a decent 2.3% dividend yield.
Warren Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) recently trimmed its stake in H&R Block but remains a significant shareholder; the stock has treated Buffett well over the years. Yes, the company has been a value trap for more than four years now, but perhaps the decision to consider divesting the mortgage business is the catalyst it needs to get growth moving in the right direction again. Plus, tax season is just around the corner, and that provides another opportunity for redemption.
For related Foolishness:
- Jackson Hewitt's Taxing Preparations: Fool by Numbers
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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.
