Tax reform spells doom for H&R Block, stock plunges most in 30 years

The early months of the year witnessed several companies reporting unusually large quarterly profits, mostly benefitting from the tax reforms announced by the Federal Government recently.

While higher tax benefits and reduction in liabilities helped corporates register better-than-expected earnings, the new rules proved to be a bane for some. In the case of H&R Block (HRB), the negative impact was huge since the company’s core business is tax preparation services.

One of the key elements of the new tax system is it allows taxpayers to file returns through simple procedures, which also makes the process less costly. Anticipating a decline in revenues after implementation of the new rule next year, the Kansas City-based H&R Block this week released revenue guidance much below Wall Street estimates, triggering a stock sell-off that slashed its market value by several millions of dollars.

The stock plunged around 18% mid-week, marking the biggest loss since October 1987 when it went down 20%. The below-forecast guidance reflects a downward revision of the prices for the company’s products and services, which is determined according to the level of complexity involved in tax preparation.

The tax bill had a huge impact on H&R Block as the company’s core business is tax preparation services

The company, which has long been facing a decline in assisted tax returns, had so far managed to absorb the resultant drag on margins by charging customers higher service fees.

Investor sentiment got a beating after H&R Block in a statement said it is looking for revenues in the range of $3.05-$3.1 billion in 2019, much below the estimates. The unexpected announcement was not well received by shareholders and analysts, who revised down the company’s earnings outlook for 2019 on an average of 10% considering the volatile business condition awaits it in the coming quarters.

Ironically, the new tax bill had come as a blessing for H&R Block in fiscal 2017, when it registered an 80% year-over-year reduction in its own income tax liability. In the fourth quarter, net profit climbed 46% annually to $1.14 billion or $5.45 per share, on a 3% increase in revenues to $2.39 billion. The top-line benefitted from an increase in customer base.

On a positive note, the management unveiled a slew of investment plans for 2019 and a program to revamp the company’s technology platforms to make them more customer friendly. H&Block shares continued the downtrend Thursday, after making modest gains in the previous trading session.