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Morgan Stanley Defends Client H&R Block

It says new tax laws should bring the business in.
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Recent changes in the tax code could benefit

H&R Block

(HRB) - Get H&R Block, Inc. Report

, as more filers seek professional advice completing forms this year.

Chris Gutek, an analyst at

Morgan Stanley

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, said new rules enacted by Congress this summer could be an advantage for the professional tax preparation industry and for H&R Block specifically.

Morgan Stanley upgraded Block to overweight from equal weight. The firm has an investment banking relationship with H&R Block. Shares were lately up 96 cents, or 2.27%, to $43.01.

Although the latest tax changes do not require new forms, Gutek expects H&R Block to market them well. "The company's well-funded marketing messages will very explicitly exploit these changes, which may create the perception that the changes are quite significant," he said in a research note.

Meanwhile, Gutek said that H&R Block's advertising will "address and partly offset" the weak employment environment -- a principle reason for disappointing results last season.

Gutek also said he expects the mortgage segment of H&R Block's business -- an area of concern for some analysts and investors -- to hold up well. "Origination volume should continue to grow, while margins should decline only modestly, so we expect the skeptics to be disappointed," he said.

Finally, Gutek said he is not concerned about recent management changes. "We do not think the resignations of the CFO and the previous auditors are related," he said. "And if the company were to announce a highly regarded new CFO in the next few months, it would be a modest positive catalyst."