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Is This the Year for Tax Prep Firms?

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Some companies have learned from their mistakes and are now better able to help in this economy.

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As 2009 winds down, people will be forced to start looking at their income and investment statements to determine how much, or little, they owe in taxes. Some newly unemployed or those that still have stock market losses may actually be due a sizable refund.

While most people will ultimately procrastinate and not deal with their tax filing until the last minute, now may be a good time to look at the companies in which Christmas comes in the spring.

For tax return firms such as H&R Block (HRB) and Jackson-Hewitt (JTX), April 14 is Black Friday. And just as retailers start tweaking inventories and prepping promotions in late summer based on expectations for the holiday season, tax prep firms begin plotting in winter what services will be in demand come spring.

On Tuesday, there was notable call buying in Jackson-Hewitt with someone scooping up 12,000 of the April $5 calls for a $0.50 contract as someone seemed to want to place an early tax-play bet. Both Jackson-Hewitt and H&R Block are set to report earnings early next week.

Death and Taxes

Typically, the fourth quarter offers scant fresh insight or guidance as it's the dull period between the last filings and payments of those getting current-year extensions and the inevitability of next year's tax bill deadline. Historically the numbers, in terms of timing and volume of filings, have been pretty consistent year in and year out.

But in recent years, there have been notable fluctuations and deviations from normal expectations. A few of the issues making tax return rates less predictable than death include the growth of software that allows for do-it-yourself tax prep, which in turn has led to the migration of filing online. Expect that trend to continue as people look to save money.

Last March, H&R Block had to issue an earnings warning when it became apparent that the volume of higher margin tax preparation and financial services in the consumer segment was running some 25% below forecast. The stock dropped some 45% in the next two month and is only now approaching those pre-warning levels around $24 a share.

Early Refund

The other item that has buffeted the reliability of revenue and earnings expectations has been the increase of early refund promotions during 2005-07. Like offering subprime mortgages, this proved to be a great way to drive traffic, but ultimately caused a lot of heartache.
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No positions in stocks mentioned.

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