Tax Season: Which Companies Will Win?

The Trading Edge with Derek HoffmanIn case you were distracted by Ben Bernanke’s testimony last week, an interesting trend in consumer behavior is taking shape during this year’s tax-filing season.

Based on news from the top tax service companies, you will see individuals are in a very cost conscious state-of-mind. Consumers are quickly selecting the cheaper of the two options: preparing your own tax forms.

In this week’s Edge, we look at H&R Block, Intuit, as well as a quick snapshot of Jackson Hewitt.

H&R Block (HRB): $17.28 The “Hamburger Helper” of Tax Prep

Shares were crushed last Wednesday after the company warned they would miss their puffed up 2010 earnings outlook. H&R Block had expected fiscal 2010 earnings from continuing operations to amount to $1.60 to $1.80 a share. The consensus estimate from analysts polled by Thomson Reuters is at the low end of that range, $1.61 per share.

Past quarter earnings are due out after the bell on March 8th. The current estimate of analysts polled by Thomson Reuters is for a profit of $.16 cents per share on revenue of $959.2 million.

CEO Russ Smyth said, “We believe industry filings are down significantly due to the recession and sustained, high levels of unemployment … the weak economic conditions have also contributed to a greater shift to do-it-yourself tax preparation methods among first-half clients.”

Comment: The Kansas City-based tax services giant has prepared 6.3 percent fewer tax returns — 10.06 million — through Feb. 15 than during the same span last year (10.7 million tax returns prepared). H&R Block will just have to bear the brunt of less clients and more empty desks at their retail locations this season.

Intuit (INTU): $32.36 The Do-It-Yourself Software Provider

The maker of Turbo-Tax earned $.34 cents per share vs. $.26 cents per share in the same period a year ago. Consensus estimates were expected to be $.32 cents per share, an upside beat for Intuit.

Revenue in the most recent quarterly report increased 8%, better than analyst expectations.

President and CEO of Intuit Brad Smith said on the quarterly conference call, “We’re off to a good start and we’re on track to deliver better than expected revenue and earnings growth for fiscal year 2010.”

Sales of best-in-class TurboTax products jumped 11%. Intuit reported selling 10.97 million TurboTax products compared to 9.9 million in the same period a year ago. The web-based version of the product saw a 23% gain in sales, a sign that online tax preparation is leading the way this season.

Comment: Management recently raised full-year guidance estimates for revenue and profits. Also, It’s important to note that Director David Batchelder purchased a sizable insider stake of over 12.5 million shares on December 15, 2009 when the stock was around $30 per share — only slightly lower than today’s price of $32.36 per share. Initial signs show Intuit with a strong start in capturing the demand for do-it-yourself tax prep.

Jackson Hewitt (JTX): $2.44 The Franchise with Ugly Financials

Fiscal 2010 3rd Quarter earnings results are scheduled for March 11, 2010.

Comment: JTX is quickly burning cash. The company has only $60K in cash remaining relative to $311 million in debt obligations. I would steer clear of this company until the financials improve; otherwise, you might get caught holding the bag as this company files for bankruptcy in the near future or becomes a penny stock.

Among the three tax preparation players highlighted above, Intuit is definitely the safest trend play, while H&R Block and Jackson Hewitt are the contrarian higher-risk pullback plays. Jackson Hewitt is definitely the weakest of the three companies, but still possesses a recognized brand name in the marketplace. Consumers do not mind the hold-your-hand service when they have the extra cushion. However, companies like H&R Block are coming to realize the cushion is either minimal or non-existent for most individuals filing taxes this year.

Disclosure: No positions in the companies mentioned.

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