Shares of tax preparation and financial services company H&R Block (NYSE: HRB) fell about 8% in trading today after the Kansas City, Missouri firm said it wouldn't meet fiscal year estimates.
Analysts polled by First Call/Thomson expected the company to earn $2.71 per share for the year ended April 30, but management today guided investors to expect earnings in the range of $2.52 to $2.55. That means earnings will grow about 8% this year, shy of the company's 15% goal. Tax services revenues grew 14.5% this year, compared with 20.1% a year ago.
Company officials said a weaker than expected tax season, accelerated amortization charges, and a one-time net loss from the sale of its NCS Mortgage division hurt earnings.
Tax season is a tough quarter for H&R Block to report trouble, since three-quarters of revenue and all of its profits are derived in the fourth quarter. The company will release full fiscal year results June 21.
Though shares slipped in trading today, most of the bad news was absorbed in early May when the company released preliminary tax preparation results that came in lower than analysts expected. The company said the total number of tax returns prepared moved up just 3.6% to 15.9 million, compared with a 6.7% increase last year. Fees for tax preparation and related services grew 12.3% to about $1.7 billion, compared with a 15% increase a year ago.
Investors took the shares down 22% over a two day period May 2 and 3 after the company reported its tax season results. It was a harsh reaction, perhaps skewed with too much of a short term perspective, but tax preparation services are H&R Block's bread and butter. With analysts expecting long-term earnings growth of 16.3%, today's announcement means this could be a stretch goal.
A company spokeswoman said management is unsure why tax earnings and revenue growth declined from last year, especially considering the reinstatement of the IRS' debt indicator program, which makes it safer for H&R Block to float loans based on tax returns and more attractive to customers since loan fees are lower. H&R Block hopes to provide some reason for the decline in its Q4 earnings release.
Management said the company is evaluating spending changes that will help the company hit its 15% annual earnings growth target next year. This is a stopgap measure, however, and the company needs to re-ignite tax services growth if it plans to beat the market over the long term.
At the same time, investors should remember that EPS growth isn't everything. H&R Block has been growing free cash flow in leaps and bounds, to $142 million in 1999 from $44.2 million in 1997. That cash gives the company lots of flexibility to pay down debt, repurchase shares, and invest in its financial services and mortgage division, which will likely get leaned on to make up for slower growth in the tax preparation business.
The company is working to grow its financial services and mortgage loan businesses and is making some progress. Mortgage operation earnings grew 50% this year. On the other hand, mortgage and financial services comprise just 20% or so of H&R Block's earnings, so strong growth in its basic tax services business is essential.
Meanwhile, the company's do-it-yourself tax preparation software, Taxcut, failed to gain market share this season and remains a distant second to Intuit (Nasdaq: INTU), which saw TurboTax sales jump 15% this year. A new partnership with Microsoft (Nasdaq: MSFT) should help boost Taxcut sales, but keep in mind Microsoft withdrew from the tax preparation software business earlier this year after failing to make a dent in Intuit's market share.
It would be risky to jump into H&R Block on the assumption that Taxcut will take market share from Inuit or contribute materially to H&R Block's bottom line. It looks like the war is over in the tax preparation software game, and Intuit won.
Investors should tread carefully until it's clear what kind of growth to expect from H&R Block's core tax preparation business.
Related Links:
The Market's Into Intuit
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