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H&R Block’s Investments to Reap Benefits, Costs May Mar Profit

Zacks

Shares of H&R Block, Inc. HRB have gained 8% in the past six months, against the industry’s decline of 24.5%.

Recently, the company posted second-quarter fiscal 2019 results, with loss per share from continuing operations at 83 cents and narrower than the Zacks Consensus Estimate of a loss of 92 cents. The figure was wider by 12 cents on a year-over-year basis. Revenues came in at $149 million, which beat the consensus mark by $10 million and improved 5.7% year over year.


H&R Block’s surprise history looks impressive. It beat estimates in each of the trailing four quarters, the average being 8.7%. For the fiscal third quarter, the consensus estimate was unchanged at a loss of 52 cents in the past 30 days.

What’s Driving H&R Block?

The tax industry is growing steadily since 2005 in assisted and DIY channels. The momentum is expected to continue in the years to come. H&R Block is well poised to gain from opportunities in the industry. In its assisted business, the company is focused on investment in price, development and delivery on a clear brand promise. In the DIY business, H&R Block continues to focus on competitive pricing and investment in product innovation and user experience improvement.

H&R Block is investing in three broad areas in 2019 — price, technology and operational excellence. On the price front, it is focusing on reduction to attain competitive pricing.

With technology, H&R Block is building a new tax engine to consolidate multiple systems, invest in cross-channel capabilities to streamline client experience across platforms, transfer physical data centers to the cloud and optimize data architecture and analytics platform. With regard to operational excellence, the company is trying to improve execution of standard operating procedures for better quality and consistency of service delivery.

These initiatives backed by a strong cash position are expected to enable the company achieve objectives of clients, revenues and earnings growth over the long term.

Risks

With increased investment in technology and operations, H&R Block is likely to witness escalation in costs. This, in turn, is expected to weigh on its bottom line through 2019.

The company’s business is significantly affected by seasonality. It generates a significant portion majority of its revenues and earns profit in the fourth quarter of the fiscal year as most of its clients file their tax returns from January through April. Revenues stay significantly down and the company incurs loss in the first three quarters of fiscal year.

Zacks Rank & Stocks to Consider

H&R Block currently carries a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A few better-ranked stocks in the broader Zacks Business Services sector are Republic Services RSG, Waste Connections WCN and Navigant Consulting NCI, each carrying a Zacks Rank #2 (Buy). Long-term expected EPS (three to five years) growth rate for Republic Services, Waste Connections and Navigant is 10.7%, 11.7% and 13.5%, respectively.

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