The Company

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• Weak TurboTax Sales Growth Stings Intuit's Stock

• Many Happy Tax Returns

The News

A boom in tax returns returned

H&R Block

The company's Kansas City headquarters reported earnings of $1.66 a share for the fiscal fourth quarter ended April 30, improving on a loss of 26 cents a share a year ago.

Earnings from continuing operations rose 17% to $2.11 per share. Wall Street analysts had a consensus estimate of $2.03 a share, according to Thomson-Reuters.

For fiscal 2008, H&R Block earned $1.39 a share, up from $1.15 a share the prior year. Analysts expected full-year earnings of $1.35 a share. Revenue in the quarter rose 11% to $2.6 billion.

Block also announced a $2 billion share buyback that could start in fiscal 2009. Earnings in the new fiscal year could range from $1.60 to $1.70 a share, the company said. Wall Street's consensus is at $1.58 a share.

Chairman Richard Breeden said the company prepared tax returns for 23.5 million clients during the completed fiscal year.

"Full-year earnings per share from continuing operations exceeded our expectations, and reflect the best tax season for H&R Block since 1999," he said in a prepared statement. The company will hold a conference call Tuesday to discuss its results. It also boosted its annual dividend 3%, to 60 cents a share.

H&R Block absorbed a charge of 45 cents a share on its Option One mortgage unit, which stopped making loans in December and was sold for $1.3 billion to vulture investor Wilbur Ross's firm on April 30.

The company also said its RSM McGladrey unit, which offers tax services to small and medium-sized businesses, improved its performance from the prior year.

The Analysis

Now that it's out of the mortgage business, Block has room to grow and can afford to better reward its investors.

"This is the first quarter where you actually see the effect of getting rid of Option One," says Morningstar's Todd Young. "That was really dragging the stock down."

Since the onset of subprime mortgage woes at the beginning of 2007, H&R Block shares lost as much as 30% of their value in volatile trading. Before Monday's earnings announcement, the stock was still down 15% from the beginning of 2007.

Although the company is still searching for a permanent CEO to replace Mark Ernst, who resigned in November, Oppenheimer & Co. analyst Scott Schneeberger says current management is better focused on cutting costs.

"We believe the new, more shareholder-friendly management team may be more aggressive than we have seen in the past," he wrote in a Monday research note.

Interim CEO Alan Bennett has publicly stated he's not seeking a permanent job.

The recent tax rebates boosted H&R Block's filing numbers, although the company also reported strong growth exclusive of the people who filed free returns to claim their tax rebates. H&R Block helped some 290,000 clients file in order to qualify for the Economic Stimulus Package (ESP) payment. This boosted the client headcount, but cut into the reported increase in fees. The number of U.S. retail clients increased 3.8% in a year.

But even the 1.9% increase excluding stimulus-seeking filers more than doubled the reported 0.9% increase in fiscal 2007. Overall client growth was 3.5%, boosted by a 6.1% gain overseas.

The Bottom Line

Nothing is certain but death and taxes, and that's great for H&R Block shareholders, particularly now that the company has exited the dodgy mortgage business.

"Now we have a clear picture of what their losses were," Young says. "By getting rid of the Option One piece you have better clarity on the whole company. There are still pieces that can be written down they still have some mortgages on their books but the level of possible write-downs compared to what it could have been is considerably smaller than a few months ago, when Option One was still in their grasp."

According to Schneeberger, H&R Block is pricier than rival Jackson Hewitt, which has struggled with operational issues. Then again, he expects H&R Block to outpace the S&P 500 in growth, while boosting margins.

"The company generates relatively more adjusted free cash flow and has considerably strengthened its balance sheet since the start of the 2008 tax season, which positions it well for share repurchases (though our model doesn't assume such activity until FY10)," he wrote.

For investors who've been taxed by other financial stocks this year, this could prove a shelter worth exploring.

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