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We are maintaining our Neutral recommendation on H&R Block Inc. (HRB - Analyst Report), following its dismal start to the fiscal 2013 with both the top line and bottom line failing to meet the Zacks Consensus Estimate and falling short of the year-ago numbers.

Being a tax preparation company, substantially all revenues of H&R Block come through the last four months of a fiscal year. Most of the clients file their tax returns from January through April of each year, thereby aiding H&R Block to generate revenues from income tax return preparation and related services & products are received during this period. Therefore, through the first eight months of a fiscal year the company generally operates at a loss.

H&R Block has a sustained focus on expense reduction initiatives. It had undertaken realignment strategies that included eliminating 350 positions and closure of 200 underperforming offices. The company expects to realize net annualized savings of $85 to $100 million from this strategic realignment by the end of fiscal year 2013. Also, it announced its plans to exit some Sears locations, lowering the count to 112 from 500 it is currently operating. It also expects it to add slightly to the fiscal 2013 earnings.

The company always remains focused on returning more value to its shareholders. Riding on the strength of its balance sheet, the company has already spent $315.0 million to buyback 21.3 million shares in the first quarter of fiscal 2013 and is left with $857.5 million under its share repurchase authorization. H&R Block also boasts of a dividend yield of 4.5%, sufficiently higher than the industry average of 2.4% as well as that of its nearest peer, Intuit Inc. (INTU - Snapshot Report) with a dividend yield of 1.1%.

Also, last month, H&R Block announced that it is exploring options for H&R Block Bank to have H&R Block, Inc. no longer being regulated by the Federal Reserve as a savings and loan holding company, as proposed rules of Federal Reserve would require higher capital requirements on savings and loan holding companies.

However, dropping the plan to acquire 2SS Holdings, Inc, developer of Tax ACT dwarfs the positives to some extent, as the merger would have intensified competition in the digital market, which is presently dominated by Intuit.

Also, the performance of H&R Block is tied to the overall health of the economy. With the continuation of a stressed economic environment and unemployment levels, the overall tax filing market is expected to remain under pressure, which eventfully will weigh on the earnings of the company.

H&R Block currently carries a Zacks #3 Rank, representing a short term Hold rating and blends well with our long term recommendation. Intuit currently carries a Zacks #3 Rank. Since their respective earnings release till date, H&R Block’s shares have gained 9.8% while Intuit shares gained only 0.6%.
 

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