Too Many Happy Returns for H&R Block

Spencer Jakab for the Wall St Journal writes: America's largest tax preparer is feeling chipper these days. Even so, it is a far cry from the old H&R Block Inc. HRB -1.67%

Its share price and earnings per share for fiscal 2013, due to be reported Wednesday, have clawed their way back to where they were in the company's 2005 heyday. But both revenue and operating income were about two-thirds higher then. Today's H&R Block, which has repurchased shares and shrunk considerably, would like to get even smaller.

Any news from management Wednesday on the sale of H&R Block's bank could trump the reaction to earnings for its fiscal fourth quarter through April. Analysts polled by FactSet see those at $2.62 a share.

That would be nearly a third higher than a year ago, despite the company saying the actual number of tax returns prepared fell slightly. Much of the expected earnings improvement should come from revenue H&R Block would have earned a quarter earlier hadn't it been for delayed tax filings arising from the "fiscal cliff." Tax-service revenue for that quarter fell 29% from a year earlier.

The sale of the bank would free up substantial capital, possibly enabling additional share buybacks. More good news on claims related to wholly owned mortgage firm Sand Canyon also would cheer investors.

But with H&R Block shares up 58% year to date, the good news appears to be priced in. So any further gains Wednesday might offer investors a good chance to take profits.

A pure tax-preparation business presents opportunities but also risks. On the plus side are "Obamacare" and immigration overhaul. More red tape, and perhaps millions more people who will be forced to cope with it, are positive.

The negatives are significant, too. A wave of free, online tax-filing options has forced H&R Block and peers to prepare returns gratis for some customers in hope of selling other services.

Meanwhile, the creation of the Consumer Financial Protection Bureau threatens the way H&R Block makes much of its money: lending people their own refunds in advance at high rates.

Still, at least one regulatory risk that H&R Block dutifully reports in its securities filings seems remote—the possibility U.S. tax forms will be simplified. The only sure things in life are death, taxes and paperwork.