H&R Block's Unexpected Loss Alarms Analysts

Though analysts were expecting the largest tax-preparation company to post a profit in the first quarter, H&R Block instead lost $44.1 million.

In a note to investors called “Credibility Shock,” Michael Millman of Millman Research Associates called the loss a “costly communications error,” Investor's Business Daily reported.

For the three months that ended July 31, rising mortgage rates hurt H&R Block's mortgage business, but the company said it expects earnings to improve as the firm adjusts to the higher rates.

Stock prices slumped more than 7 percent by mid-day Wednesday to $47.46, and Millman said the stock would only be worth buying if it dropped to the low $40 range.

Goldman Sachs' analysts said the possibility of earnings growth remains low because tax season is over, client growth has been weak, the mortgage business is volatile and the firm is losing money at its investment services division and building up a new business services unit.

The regional brokerage business has bogged down H&R Block. The company bought the brokerage for $850 million in 1999, but since then, enthusiasm to invest in stocks has waned. Over the last three fiscal years, H&R Block's investment services group lost $248 million on a pretax basis, according to a research note by Gimme Credit reported by Reuters.

Some analysts are wondering if H&R Block will sell the brokerage.

"If it (H&R Block's brokerage) continues to result in losses, they'll have to do something,” said Alexander Paris, director of research at Barrington Research Associates Inc. in Chicago. “I wouldn't put a one-year deadline on it. Nothing is imminent, but in the long run they have to look out for the shareholders."

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