H&R Block drops after 1Q report, ahead of hearing

H&R Block shares drop sharply after reporting wider 1st-qtr loss, ahead of antitrust hearing

Associated Press

NEW YORK (AP) -- Shares of H&R Block Inc. fell sharply Friday after the nation's largest tax preparer reported a wider loss for its fiscal first quarter and revealed that an antitrust hearing on its proposed acquisition of the maker of TaxAct software will begin on Tuesday.THE SPARK: Block reported a loss of $175.1 million, or 57 cents per share, for the period ended July 31. That compares with a loss of $130.7 million, or 41 cents per share, a year ago. The higher loss was driven mainly by a charge of 20 cents per share largely attributed to the sale of its business tax and consulting unit, RSM McGladrey. Underperformance at the unit also weighed on revenue, which fell 2 percent and missed Wall Street forecasts.In addition, CEO Bill Cobb said a hearing will begin Tuesday on the federal government's suit to prevent Block's acquisition of 2S Holdings Inc., the parent of the software company that created TaxAct. Kansas City, Mo.-based Block wants to buy TaxAct as a way to bolster its digital, do-it-yourself business, which lags rival Intuit Inc.'s TurboTax.THE BIG PICTURE: The fiscal first quarter is a seasonally slow period for Block and analysts viewed the results as relatively in-line, even with the revenue miss. Oppenheimer analyst Scott Schneeberger said the sale of RSM McGladrey will allow Block to focus more on its core tax business, and should help improve profit margin.The hearing comes a few days after the government moved on a similar effort to prevent AT&T's purchase of T-Mobile USA. The Obama administration has said it will fight combinations that would reduce competition and hurt consumers, an argument it has used in both cases.THE ANALYSIS: Schneeberger and Morgan Stanley analyst Thomas Allen both raised an issue Block prefers not to discuss: the overhang from its shuttered subprime mortgage business. While it stopped writing new loans in in December 2007, the company still faces the potential for investors pressuring it to buy back soured loans. During the quarter, Block said $48 million of such claims were reviewed, with just $500,000 of incurred losses.Allen noted the issue "remained benign" in the quarter, but said increased claims could concern investors.Schneeberger said reports that Federal Housing Finance Agency may pursue lawsuits against banks that sold the risky mortgages and related securities could impact the stock. He also noted that the shares are typically weak in September and October.SHARE ACTION: H&R Block lost $1.88, or 12.4 percent, to $13.31 in afternoon trading about three times heavier than normal. The stock has changed hands between $10.13 and $18 in the past 52 weeks.

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