Earnings preview: A weak Q3 awaits H&R Block as tax-reform blues persist

H&R Block (HRB) has been an unsuspecting victim of the tax revision implemented by the federal government more than a year ago, and the tax consultancy firm continues to face headwinds from the reform that brought good luck to several businesses.

The Kansas City, Missouri-based company will be releasing its third-quarter results Thursday before the opening bell. The general perception is it will remain in the negative territory, with profitability coming under pressure from the persistent squeeze on margin. Though the company had managed a turnaround a couple of quarters ago, it could not sustain the momentum mainly due to the weakening demand for its key services.

Though there was a sequential improvement in the bottom-line performance in recent quarters, a full recovery in the near term looks far-fetched

Though there was a sequential improvement in the bottom-line performance in the trailing two quarters, which also came in about the estimates, a full recovery in the near term looks far-fetched. The sharp increase in standard deduction after the new taxation norms came into effect has created a situation where fewer customers use the company’s assisted online tax filing service, which is an emerging growth driver. Market watchers forecast a loss of $0.53 per share for the December-quarter on revenues of $465.5 million, which reflects a weaker performance compared to last year.

For the second quarter, H&R Block had reported a wider net loss, hurt mainly by higher expenses and seasonal factors. During the quarter, adjusted loss per share widened to $0.83 from $0.71 in the prior year, despite a 6% growth in revenues to $149 million.

Also see: H&R Block Q2 2019 Earnings Conference Call Transcript

Intuit (INTU), H&R Block’s main competitor, will be reporting its third-quarter numbers on May 23 after the market closes.

Goldman Sachs in its most recent research note assigned H&R Block shares a sell rating. The price target for the stock, which has earned a mixed rating in recent months, ranges from $25 to $28. It has been trading below the long-term average for quite some time, often outperforming the sector. The stock lost about 13% in the past twelve months and slipped 6% since the beginning of the year.

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