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H&R Block: The Good, The Bad, The Ugly


Costs went up across the board-spending more to make less. This is never a good sign for a business.


Editor's Note: Steve Zausner of Vicis Capital contributed to this article.

The Good:

  • Tax revenues at H&R Block (HRB) and income did grow at roughly 9 percent each.
  • The company raised cash by about $300 million.

The Bad:

  • Revenues and income came in below consensus.
    • Income missed by 7 cents and revenues were $2.35 billion versus $2.47 billion consensus.
  • Costs went up across the board-spending more to make less. This is never a good sign for a business.

The Ugly

  • HRB guided down for FY '08.
    • It sees EPS of $1.25 vs. $1.47 consensus.
  • There's a decent amount of balance sheet deterioration.
    • Mortgage loans held for investment spiked by $1.3 billion. My guess is that HRB was not able to sell this in this lousy environment for subprime.
    • It had not been HRB's game to hold these. Also, it shows that the company is left holding some of the bag from Option One.
    • Long-term debt increased by about $100 million. CP borrowing increased by $1.5 billion (if this carries for another couple of quarters, it could become very worrisome).
  • Given loss and purchases of mortgage, HRB's cash flow statement is a mess

Following its fourth straight quarter (and seven out of the last eight) of missing numbers, HRB is now trading at 19.7x '07 earnings and 17x 08 mid-range guidance (I was being kind by taking mid). Both multiples are above HRB's five-year average trading range. While the market will focus on the Option One sale, my firm's opinion is still that this is something of a canard-regardless of what the company sells the business for (it hasn't set a price yet and HRB is still exposed to losses in that business). HRB's core tax business is still struggling (revenues gains were not in line with money spent to achieve them); thus HRB's balance sheet continues to deteriorate.

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Position in HRB

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