We are downgrading our recommendation on H&R Block (HRB) to Underperform from Neutral. The company has recently announced that it would not be able to meet its previously announced fiscal 2010 guidance as it is preparing fewer tax returns than it had previously expected.
The tax filing market is shrinking due to the rise in unemployment. Also, there is a continued shift from assisted tax preparation to the digital space, where the company's growth is not yet satisfactory.
Additionally, the increased price sensitivity of consumers and loss of market share remain other headwinds. However, the company's leading position in the tax preparer market, its strategic initiatives to grow its business through gaining and retaining customers and its cost containment measures augur well for the longer term.