The American Health Care Act the Affordable Care Act replacement that’s also going by the names ‘Ryancare’ and ‘Trumpcare’ in certain circles — has been met with its fair share of criticism on the left and the right. There is, however, one entity that welcomes the upheaval in healthcare policy and the resulting effect on tax laws: tax preparer H&R Block.
In a conference call following better-than-expected third quarter earnings results Tuesday evening results that account for much of H&R Block’s 16% surge in Wednesday trading CEO Bill Cobb said that he is not afraid of what changes in healthcare and tax policy mean for H&R Block’s business. In fact, he’s downright bullish.
“I think in the end, frankly, wherever it nets out, people are going to be confused. I think they are going to turn to us for help,” Cobb said. He noted that the parts of any healthcare reform that are grounded in refundable credits would go through the tax code and confusion around this, in turn, could give consumers a reason to consult a tax preparation service like H&R Block.
“I think they need help sorting through that,” he added.
Regardless of whatever happens on the healthcare front, Cobb believes the biggest boost to H&R Block’s business would come not from taxes that regular consumers pay but the corporate taxes that it pays.
“What’s getting lost in this, the most important benefit to H&R Block ultimately could be the corporate tax reform. Everything I’ve seen is, the centerpiece of that is to lower the rates, and given we run 35% tax rates, plus or minus, all the numbers I’m seeing, that’s going to be a lot of money for us,” Cobb said. “So I continue to be puzzled as why people write that this is going to be some big negative for H&R Block, I think it’s a tailwind for us.”
Given the debate surrounding healthcare policy and tax reform, it’s a tailwind whose specific details could take some time to emerge. A nearer tailwind for H&R Block stock is the 2016 filing season, which has gotten off to a slow start but in which the storefront-focused tax preparer says it has outperformed its industry.
“H&R Block return volume outperformed industry results when compared to IRS data reported through February 24. In total, the IRS reported a decline in e-files of 10% compared to the company’s decline of 7%,” the company said, noting that it grew market share in both the “assisted” and “do-it-yourself” categories.
As for how this out-performance translated to H&R Block’s top and bottom lines: The tax prep service recorded $451.9 million in third quarter revenue, down about $23 million year-over-year but well ahead of the $385 million Wall Street expected. While the third quarter net loss widened to $101 million — that’s 49 cents per share — from the year-ago loss of $79 million, or 34 cents per share, the per-share figure was a narrower loss than the 55 cents per share that analysts expected to see.
Wall Street analysts attributed the results to cost-cutting and client-accruing tactics the firm has employed in recent months, like a partnership with IBM Watson and expanded free filing options.
“Reversing strategy after recent years of losing early tax season share, H&R Block introduced multiple new offerings to ‘arrest the client decline’ and garnered resulting competitive share gains in this challenged early tax season,” Oppenheimer analyst Scott Schneeberger said in a note on Wednesday. “It was a necessary result, as it staves off meaningful downside pending additional effective execution in the back half of the season.”
The back half of the current filing season could prove a little less fruitful for H&R Block, which the company freely admits: “While overall industry and company volume is expected to improve during the second half of the tax season, company performance relative to the industry is expected to moderate given the conclusion of its Free Federal 1040EZ and Refund Advance promotions on February 28,” it said Tuesday.
This warning has done little to temper gains for H&R Block stock: shares opened for Wednesday trading up about 10% and continued to climb from there. The stock is currently up 16.3%.
Date: March 08, 2017