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We have retained our Neutral recommendation on H&R Block Inc. (HRB - Analyst Report). The stressed economic environment, high unemployment levels and delayed start to the tax season are expected to weigh on the positive effects of the company’s cost cutting initiatives.
 
Why Reiterate?

The sluggish economic environment and high unemployment levels have pressurized the overall tax filing market that is H&R Block’s focus. Again, timing issues from the IRS regarding opening its e-file system on Jan 30 and thus the delayed start of the U.S. tax season has compelled the top line to decline during the period. As a result H&R Block’s earnings are expected to remain soft in the near term as the company will take time to recover.

Over the last 30 days two of five estimates moved downwards, pulling down the Zacks Consensus Estimate for the fourth quarter of fiscal 2013 to $2.60.

Additionally, continued shift from assisted tax preparation to the do-it-yourself mode, mainly through the digital online space poses a threat to H&R Block’s business. Though the company is geared to grow its digital business, the pace of growth is not aggressive enough to catch up with the growing competition.

Counting on the positives, H&R Block has emphasized reducing expenses through workforce reduction, cutting down overhead expenses and increasing operational efficiency. The company has eliminated 350 positions and closed down 200 underperforming offices. Management expects these strategic realignments to help the company realize an annual savings of $85–$100 million by the end of the fiscal year 2013. Furthermore, the deal with Sears, where H&R Block intends to focus on the 112 best performing Sear locations is expected to be slightly accretive to fiscal 2013 earnings.

Further, H&R Block continues to increase shareholders’ value. The company has already spent $315.0 million to repurchase shares in the first nine months of fiscal 2013. H&R Block also declared a quarterly dividend of 20 cents in Mar 2013, boasting of a dividend yield of 2.9%, better than the industry yield of 1.83% and 0.93% yield of another industry major Monro Muffler Brake Inc. (MNRO - Snapshot Report). The company also scores strongly with the credit rating agencies.

However, the company’s exposure to various employment related lawsuits and compliance fee litigations might weigh on investor sentiments and hamper the company’s goodwill. Additionally H&R Block’s decision to drop the acquisition plans of 2SS Holdings, Inc, developer of Tax ACT digital tax preparation solutions, did not help the company to expand its business in the digital market which is now being dominated by Intuit Inc. (INTU - Snapshot Report).

The tax preparer currently carries a Zacks Rank #4 (Sell).

Other stocks to consider

Among others in the industry, Weight Watchers International Inc. (WTW - Snapshot Report) carries a Zacks Rank #2 (Buy) and is worth noting.

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