H&R Block Downgraded

Zacks

We are downgrading H&R Block Inc. (NYSE:HRB - News) to Neutral from Outperform  because of the higher-than-estimated net loss incurred in its fiscal second quarter results. The company also had to drop plans to acquire 2SS Holdings after the federal judge passed a ruling against the deal on antitrust grounds.

H&R Block reported adjusted loss of $0.38 per share, wider than the Zacks Consensus Estimate of a loss of $0.35 as well as $0.36 a share incurred in the year-ago period. Litigation costs coupled with charges related to the discontinuation of ExpressTax also weighed on the results in the quarter.

After a long wait, H&R Block dropped its plan to acquire 2SS Holdings, Inc, developer of Tax ACT digital tax preparation solutions, in a $287.5 million all-cash deal. The decision came after a federal judge passed a ruling against  the merger on antitrust grounds. The acquisition was intended to augment the company’s digital tax offerings as well as aid performance. The company had plans of consolidating its H&R Block At Home digital business and the acquired TaxACT unit. Had the acquisition materialized, H&R Block would have  enjoyed an enlarged client based. Also, the merger would have heated up competition in the digital market, which is presently dominated by Intuit Inc. (INTU).

Among the positives, H&R Block divested the ill performing RSM McGladrey to McGladrey & Pullen, LLP. RSM McGladrey failed to post revenue growth in the past few quarters. We believe the divestiture will be accretive to the company's long-term ROE and overall margin. It would bring about a more concentrated focus on its core tax business.

With an intention to return more value to its shareholders, the Board of Directors authorized an increase of 33% in its dividend to $0.80 per share. The dividend increase announcement came after a long gap of more than 3 years. Also, during the fiscal second quarter, H&R Block spent $177.5 million to buy back 4.3% of its outstanding shares. The company is left with $1.2 billion under its share repurchase authorization. With a strong financial position we expect the company to continue to enhance shareholders value.

The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.

Headquartered in Kansas City, Missouri, H&R Block Inc. is a leading provider of tax preparation services. Through its subsidiaries, the company provides tax, retail banking, accounting and business consulting services and products in the U.S., Canada and Australia.

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