H&R Block Downgraded

We are downgrading H&R Block Inc. (HRB - Analyst Report) 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 - Snapshot Report).

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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