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H&R Block (HRB) Q3 Earnings: What Lies Ahead for the Stock?

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H&R Block Inc. (HRB - Free Report) is scheduled to report third-quarter fiscal 2018 results after the market closes on Mar 6. The company has an impressive earnings surprise history, beating estimates thrice in the trailing four quarters with an average positive surprise of 11.8%.

Let’s see how things are shaping up for this announcement.

Key Factors to Consider

H&R Block is continuing with its aggressive client expansion policy with compelling promotions and product offers. At the same time, the company is actively investing in innovative solutions that leverage its ability to better serve customers through customized products. These include a redesigned website to file taxes anywhere on the go, high security standards to prevent tax identity theft and enhanced security features to safeguard taxpayer information. With such core business focus, the company anticipates providing improved services to its existing clientele while attracting newer ones to augment revenues.

Moreover, the company has upgraded its desktop software by adding a slew of new features. The drag and drop feature enables users to import previous tax information and tax returns from any source. In addition, a maximum of five free federal returns can be filed. Free In-person Audit Support including step by step assistance for IRS Correspondence Management, Audit Preparation and Audit Representation will also be provided. It includes the option to add Tax Identity Care service at an extra price which will protect clients from tax identity theft. By providing high quality services at such reduced rates or for free, H&R Block aims to increase its consumer base in the tax services market.

The company has been making various enhancements to its online digital tax software in order to improve monetization and conversion for the long run. It has also been focused on operational excellence, new product developments, partnerships, compelling marketing campaigns and promotions. The company expects these efforts to result in improved financial performance in fiscal 2018 accompanied by an increase in client trajectory.

However, the company faces huge litigations in connection with its various operating activities. H&R Block is also exposed to employment related lawsuits in various parts of the country and compliance fee litigation in Missouri state and federal courts. Such litigations weigh on investors’ sentiments and hamper the company’s goodwill. Moreover, its debt-to-equity ratio compares unfavorably with the sector average. Additionally, the cash position of the company is fluctuating in nature. This raises skepticism about its ability to engage in de-leveraging activities.
 
H&R Block uses multiple digital technologies to collect, transmit and store high volumes of personal client information, which increases information security risks. The company is highly susceptible to cyber attacks including computer viruses, malicious codes, worms, phishing attacks, social engineering, denial of service attacks and other sophisticated attacks. These cyber attacks are designed to electronically circumvent network security for malicious purposes such as unlawfully obtaining personal client information and disrupting ability to offer services. This, in turn, could damage the brand name and credibility, resulting in loss of business. H&R Block has to continually invest in security measures to keep guard against cyber espionage, which leads to additional burden on its exchequer and erodes margins.
 
Earnings Whispers

Our proven model does not conclusively show that H&R Block is likely to beat earnings this quarter as it does not possess the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and Zacks Consensus Estimate, is -24.29%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

H&R Block, Inc. Price and EPS Surprise

 

H&R Block, Inc. Price and EPS Surprise | H&R Block, Inc. Quote

Zacks Rank: H&R Block has a Zacks Rank #2. While this increases the predictive power of ESP, we need to have a positive ESP to be confident about an earnings surprise.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks to Consider

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Dollar General Corporation (DG - Free Report) has an Earnings ESP of +1.86% and Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

ProPetro Holding Corp. (PUMP - Free Report) has an Earnings ESP of +1.79% and a Zacks Rank #3.

Red Hat, Inc. has an Earnings ESP of +2.02% and a Zacks Rank #3.

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