Tax Time Bets That Could Pay Off

Although most industries are affected by the economic slowdown, the tax-preparation industry seems to remain strong. With the government stimulus package providing further incentive for filers to seek tax advice this year, some of these firms are worth further investigation. So, with tax time just around the corner, perhaps we should look for a return in the business of filing returns.

IN PICTURES: Top 10 Solutions For A Big Tax Bill

Trade-Downs Should Boost HRB's Profits
Recently, shares of industry leader H&R Block (NYSE:HRB) jumped nearly 8% after the company reported a better-than-expected quarterly profit. HRB disclosed that it was gaining significantly more higher-income filers who appeared to be trading down from pricier tax-preparation services. According to Chairman Richard Breeden, the trend is expected to generate higher per-client fees for H&R Block as it enters the critical February to April tax-preparation quarter, a time when the entire sector makes the bulk of its profits.

Jackson Hewitt Shares Plunge on Credit Concerns
Not all players in the industry are expected to sail through this year's tax season. Over the last month, shares of the No.2 tax preparer, Jackson Hewitt (NYSE:JTX), have plunged nearly 80%. This was following the disclosure by management that the company is at risk of breaching a leverage ratio covenant in connection with its bank-provided credit facility. At the end of January, the ratio stood at 3.1 and is expected to rise materially during the current quarter, a time when the ceiling value for this ratio is set at 3.15. Not surprisingly, management is now pressing its bankers for some relief on this issue.

Recently, however, JTX received some good news that could help its case. The company announced that it had closed a deal with Walmart (NYSE:WMT), almost doubling its operational footprint with the retail giant. Starting in the 2010 tax season, Jackson Hewitt will become the exclusive tax preparation provider at the 2,250 participating Walmart locations. Currently, the company has outlets in 1,200 Walmart locations. However, for this year's tax season the company still expects a 12-13% reduction in returns prepared, resulting in a revenue drop of 8-10% compared to last year. Despite all the grim news, stock rater Standard & Poor's continues to maintain a "Buy" recommendation on JTX. (To learn more about stock ratings, read Stock Ratings: The God, The Bad And The Ugly.)

Do-It-Yourself Filers Continue to Favor Software
Intuit (Nasdaq:INTU), maker of the popular TurboTax program, should continue to benefit from the growing segment of savvy consumers capable of doing their own filings. Some analysts see this trend accelerating this year, as filers look to software to ensure that they reap the full benefits of the current government stimulus plan. (For more on filing your own tax return, check out the answer to our frequently asked question: What aids will help me file my own tax return?)

Competition remains strong, however, as H&R Block continues to offer free online tax filing for lower-income customers. In addition, HRB continues to price its own TaxCut software below TurboTax.

The Bottom Line
While competition in the tax-preparation industry is as fierce as ever, the overall business is relatively recession-proof. Instead of just filing your tax return this year, look for ways to cash in on this industry.