H&R Block Upgraded to Neutral - Analyst Blog

We have recently upgraded H&R Block Inc. (HRB) to Neutral from Underperform based on the company’s restructuring initiatives, sustained efforts in gaining and retaining customers as well as effectively containing costs.
 
H&R Block has been working rigorously to reduce its expenses. The company remains focused to reduce workforce, cut down overhead expenses and increase operational efficiency through restructuring programs. The initiative aided the company not only to report better-than-expected earnings in the past few quarters, but also resulted in additional savings for reinvestment in new initiatives.
 
H&R Block expects realigning its field and corporate support organization to save $140 − $150 million annually. The realignment of field and support services announced by the company in May will help in achieving this target.
 
Also, through stepped-up marketing activities, improving the customer experience at its tax preparation offices and lowering price points, the company remains focused not only on retaining, but adding new customers.
 
H&R Block continues to return value to its shareholders. It has been paying dividends regularly. On July 29, the board of directors of the company authorized a quarterly dividend of 15 cents. Also, in fiscal 2010, the company bought back 12.8 million shares.
 
H&R Block reported solid earnings during the fourth quarter of 2010, surpassing the Zacks Consensus Estimate of $2.04 by 7 cents. The better-than-expected results were aided by lower operating expenses and share buyback.
 
However, the company’s segments suffered revenue declines as a lackluster economy and a rise in unemployment resulted in lower tax filings.
 
The Zacks Consensus Estimate for the first quarter of 2011 is a loss of 41 cents per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, $1.58 and $1.81 per share.
 
The company intends to market vigorously, focus on financial products and improve client service in the retail business. In its digital business, H&R Block will focus on drawing additional new clients to its online segment. At McGladrey, it expects to leverage the partnership agreement to further enhance its presence in the middle market segment. We believe these strategic initiatives would position the company well for long-term growth.
 
The quantitative Zacks #3 Rank (Hold) indicates no clear directional pressure on the shares over the near term.