Standard & Poor’s Ratings Services (S&P) has lowered its rating outlook on the tax service provider H&R Block Inc. (HRB), to stable from positive. The rating agency has assigned a BBB/A-2 counterparty credit rating on H&R Block.
The downgrade reflects H&R Block’s inability to execute on its tax strategy that lost momentum and hence failed to gain a steady market share across its distribution platforms in the recent years. Also, the company lost senior executives in 2010, including chief executive officer, chief financial officer and general counsel.
However, the stable outlook encompasses H&R Block’s leading market position in retail tax preparation, focus on its tax-related business and strong cash flow.
Standard and Poor’s said that it will consider a rating upgrade if the company reports solid profits regularly, stabilizes its market share, maintains sufficient financing, liquidity and leverage. Besides, H&R Block would also have to mitigate risk exposure to its former mortgage operations and repurchase commitments and litigation.
H&R Block reported solid fourth quarter results aided by lower operating expense and share buyback, though fewer tax filings proved to be a drag. The company remains focused on trimming operating expenses by $140 – $150 million per year by the end of fiscal year 2012. The company expects the realignment of field and support services announced in May will help in achieving this target.
The Zacks Consensus Estimate for first-quarter 2011 is a loss of 41 cents per share. For full years 2011 and 2012, the Zacks Consensus Estimates are peged at $1.58 per share and $1.81 per share, respectively.
Based on the company’s restructuring initiatives, sustained efforts in gaining and retaining customers as well as effectively containing costs, we maintain our “Neutral” recommendation on H&R Block. The quantitative Zacks #4 Rank (short-term Sell rating) indicates a downward pressure on the shares.
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