H&R Block's Killer Quarter Lights Fire Under Battered HRB Stock

Wayne Duggan

It's not often that the market rewards a company for a pretax quarterly loss of $150.6 million. However, expectations for H&R Block (ticker: HRB)'s fiscal third-quarter earnings report were so low that shares are higher by more than 16 percent on Wednesday.

H&R Block reported its third consecutive quarter of earnings losses on Tuesday, revealing earnings-per-share loss of 49 cents. Revenue for the quarter came in at $452 million, down $23 million from the previous year. While those numbers may seem disappointing at first glance, they both comfortably topped Wall Street analysts' consensus expectations for the quarter. According to Estimize, Wall Street was expecting EPS loss of 71 cents per share on revenue of $385 million.

[See: 7 Ways to Tell if a Stock Is a Good Price.]

For H&R Block and its tax preparation rivals Liberty Tax ( TAX) and Intuit ( INTU), the investment thesis is all about tax season. It's typical for H&R to report losses in three out of the four quarters of the year prior to delivering huge profits during tax season.

In addition to H&R Block's third-quarter beat, the market sees several other reasons for optimism in the future. Perhaps the most bullish part of Tuesday's report was the company's surprising market share gain. According to the report, the IRS reported an overall 10 percent decline in e-filing this year through Feb. 24. H&R Block's modest 7 percent decline suggests the company has gained some critical ground relative to the competition.

"The growth in market share is attributable to solid execution of an aggressive plan designed to change the trajectory of prior year client losses," H&R Block CEO Bill Cobb says.

Looking ahead, Cobb sees President Donald Trump's tax reform initiatives as a major growth opportunity for the company. "People are going to be confused. I think they're going to turn to us for help," Cobb says.

[See: 7 Dividend Stocks to Benefit From Trump Tax Changes.]

Wednesday's big move provided some much-needed relief to H&R Block investors. In the past year, the stock has declined more than 20 percent. According to YCharts, total short interest in the stock is up 57.7 percent in that time.

Wayne Duggan is a freelance investment strategy reporter with a focus on energy and emerging market stocks. He has a degree in brain and cognitive sciences from the Massachusetts Institute of Technology and specializes in the psychological challenges of investing. He is a senior financial market reporter for Benzinga and has contributed financial market analysis to Motley Fool, Seeking Alpha and InvestorPlace. He is also the author of the book "Beating Wall Street With Common Sense," which focuses on the practical strategies he has used to outperform the stock market. You can follow him on Twitter @DugganSense, check out his latest content at tradingcommonsense.com or email him at wpd@tradingcommonsense.com.