Tax Preparation Could Make You Rich

Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

One of the leading tax preparation firms, H&R Block (NYSE: HRB) was founded back in 1955 and claims to have prepared more than 600 million tax returns. In 2012, the company prepared 25.6 million tax returns, up from 24.5 million in 2011. However, these fancy numbers do not gauge the company’s future performance. In the recent quarterly results, the company reported a loss of $107.6 million with sales declining 4.1% compared to last year’s quarter.

Last year H&R Block sold off RSM McGladrey to McGladrey and Pullen for $610 million, in order to refocus on its core competencies, and to preserve shareholder value. Earlier this year, the company announced that it would be shutting down 200 underperforming offices, along with 350 layoffs, in order to save $85 - $100 million annually. However, none of these events offer growth potential, and in my opinion cost cuts don’t necessarily reflect a promising future.

Not all tax preparation companies are facing a similar fate, as Intuit (NASDAQ: INTU), one of H&R Block’s biggest competitors, reported a 12% jump in sales and a loss of 3 cents per share (excluding options expenses and one-time charges) that beat the street’s estimates. The management at Intuit expects the revenue growth to be 10% - 12% for the year.

Intuit has been thrashing H&R block, by providing cloud services to tax professionals along with its easy to use online tax preparation services. The company had acquired marketing the SaaS company, Demandforce, for $432.5 million, and it was recently integrated to Intuit’s Quickbooks accounting software. This gives tax preparing SME’s, added flexibility for tax preparations and servicing their clients. Intuit also acquired mobile payments company AisleBuyer for $80-$100 million. These acquisitions helped Intuit to venture into the digital arena, and gave it the competitive edge.

It would be interesting to see if RackSpace (NYSE: RAX) could play a role here. The OpenStack open source cloud services from RackSpace have already taken market share from its proprietary cloud based competitors, and any possible tie up or joint venture of RackSpace with Intuit could push the latter miles ahead of its competitors.

It’s also worth noting that by December 2013, all the tax preparation professionals, who are not Certified Public Accountants (CPAs) and Enrolled Agents (EAs) would be required to pass an RTRP exam to retain their careers. A report claimed that nearly 350k professionals would be required to take the test, out of which roughly 23k have passed it. Assuming that all the professionals won’t be able to pass the test, we can expect a shortfall of tax preparation professionals in the near term future. This shortage of professionals would cause an increase in the wages of tax preparers, which would ultimately lead to stressed margins of tax preparation companies like H&R Block.

Wrap Up

The unemployment rate has dipped, which could result for more tax filings. There are not many pros for H&R block as it has $600 million in debt due in the coming year, and it would be raising $500 million through its bond sale. It’s like raising new debt, to repay old debt. Also the revised IRS norms would create a shortage of tax preparers, which would cause a drop in revenues for H&R block. Either margins will be further squeezed or the company will be forced to raise tax preparation prices, which would give Intuit pricing advantages.

PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Rackspace Hosting. Motley Fool newsletter services recommend Intuit and Rackspace Hosting. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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