Excellent analysis of Block's business model....Your discussion highligh...

Suggestion by Irakrakow on 2008-01-07 18:46:29

Excellent analysis of Block's business model....Your discussion highlights many of the "challenges" facing HRB, which recent events have reinforced.

First, shares of Jackson Hewett (JTX) fell 23% and HRB fell to a 52 week low of $17.75 on January 3, when the IRS disclosed that it was considering revising, and possibly banning RALs. The IRS sees a possible conflict of interest in tax preparers aggressively claiming refunds and then pushing RALs to gain extra profit. Any ruling will occur after the 2008 tax season ends in April, and so would affect the 2009 season. However, this is a signal that the IRS will look closely at RALs and might, as it already has, limit the interest rate charged for RALs, and consequently Block's profit.

Second, the deal for Cerberus to acquire the Option One subprime mortgage unit of HRB has collapsed, costing CEO Mark Ernst his job. Option One's operations have stopped, causing Block to take a loss of $551 billion. However, this is not the end of the story. HRB originated $40 billion in sub prime loans and hasn't yet written down any of it. On November 19, 2007, Jerry Choate resigned from the board for "health reasons". However, he still is on the board at Amgen and Valero. Does he know something we don't?

Finally, the IRS revised the rules for the Alternative Minimum Tax (AMT) to allow taxpayers with certain deductions to get higher refunds. The final forms are not slated to be ready until February 11. This means that the tax season will be compressed into a shorter time period for those affected filers. This probably won't affect Block's revenue for the quarter in total, but it might delay some revenue to the end of the quarter.

Your analysis, plus these recent developments, support the bearish case for HRB.

Sources:
http://www.fcw.com/online/news/151209-1.html http://www.seekingalpha.com/article/59258-jackson-hewitt-h-r-block-fear-of-irs-ral-ban-sinks-stocks http://www.seekingalpha.com/article/58417-can-cerberus-survive-the-hole-it-s-digging http://www.seekingalpha.com/article/56805-h-r-block-s-in-big-trouble-heading-into-tonight-s-earnings http://www.consumermortgagereports.com/category/option-one-mortgage/ http://biz.yahoo.com/e/071119/hrb8-k.html

Add comments or discussion related to this suggestion here.

Wikinvest © 2006, 2007, 2008, 2009. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.