Tax-prep-service provider H&R Block has little intention of posting a positive fiscal-second-quarter-earnings figure because it's one of the most seasonal shops in town. Still, while investors and analysts expected a loss, this one came in worse than estimates, if a little better than last year's comparable quarter. The company has struggled with the divestiture of its savings and loan business -- a segment that management wants to leave behind for an easier regulatory environment. H&R Block's earnings miss shouldn't concern existing investors much, as it was a necessary charge for improving long-term prospects for the business, but investors should keep a close eye on competition, as this is yet another space that faces intense disruption.
Revenue slipped slightly from 2012's $137.3 million to $134.3 million. Analysts wanted sales closer to $138 million. The company actually saw some compelling results for the traditionally weak quarter, including improved interest income from its various personal and small-business tax services. The overall drop in service revenue was due to timing -- not a drop in demand.
Margins looked a bit crunched, though, as operating expenses rose roughly 4% to $315 million based on higher marketing spending and some compensation benefits.
At the bottom end of the income statement, H&R Block lost $104.9 million -- $0.39 per share. This comes in as a negligible improvement from last year's loss (the same on a per-share basis), and a penny worse than analyst consensus for the quarter.
As H&R Block is able to put its banking segment into the rearview and arrange a partnership with a lender to enhance its business-services segment, earnings may become less lumpy and less wholly reliant on the first four months of the year. To go a step further, business services may be the future of the company.
H&R Block's personal-tax-preparation services are far more expensive to provide than Web-based services such as Intuit's TurboTax and Blucora's TaxAct products. Both have nailed down their respective markets -- higher- and low-end markets, respectively. H&R Block has its own Web-based tax preparer, but it's facing very difficult and well-established competition in the space. For this reason alone, investors should tread carefully into the stock.
H&R Block's service is priced similarly to TurboTax, while TaxAct offers a cheaper, slimmed-down version of the two. TurboTax is the leader in the segment, with an army of top reviews and arguably the best user experience.
At 13 times earnings, H&R Block is more expensive than Blucora, which has just as good if not better growth prospects. The former does, however, trade at a decent discount to Intuit's 18.6 times earnings. Still, with a threatened business model and fair valuation, H&R Block isn't an attractive buy today.
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The article H&R Block Improves, but Threat of Disruption Remains originally appeared on Fool.com.Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends Intuit. The Motley Fool owns shares of Intuit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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