Jackson Hewitt Rises in Its Off Season

America’s second largest tax preparation firm, Jackson Hewitt (JTX), reported a narrower loss in fiscal 2010 second quarter. The first two quarters of the year are always tough for tax firms because of the cyclical nature of their business; however, the better than expected report has shares soaring more than 16%. The company was able to cut costs in the quarter allowing an earnings beat even as revenue came in below expectations. Excluding some one-time items, JTX lost $19.5 million or $.66 per share on revenue of only $4 million, which compares favorably to a loss of $.78 per share in 2Q last year. Analysts were expecting to see the company lose 74 cents on $5 million in sales.

The positive reception from the market to Jackson Hewitt’s quarter has little to do with their performance, as the company only makes 2% of sales in the first two quarters of their fiscal year. Instead, the stock’s performance has everything to do with the preparations that JTX is making headed into the tax season. For example, Jackson Hewitt announced their presence in Walmart Stores (WMT) will be more numerous than first thought. The company said they will operate in as many as 1900 Walmarts which is better than previous forecasts of 1500 to 1750, and will help offset the closure of more than 200 underperforming stores.

The company is trying to regain market share lost in recent years by getting its stores that will generate consistent traffic and on Walmart.com. In addition, they are said to be in development of a do-it-yourself resource to compete with Intuit’s (INTU) TurboTax product which dominates the market. Although JTX does not expect significant revenue this year from its digital product, it will at least begin to address an area of concern.

For some time we have had an Undervalued rating on JTX, and it looks attractive based on a price-to-cash earnings and price-to-sales at current levels. From a valuation perspective, a stock that has lost almost 70% of its market value year to date is either a striking value or possibly a falling knife. While there are concerns over competition from the likes of TurboTax, we think that Jackson Hewitt’s original model continues to have merit. There are two certainties in life: death and taxes. Some people just do not want to do their own taxes and putting branches where there are already going to be a lot of people is a solid strategy. The most recent quarter has little effect on the company’s fundamentals, but it does show that they are proactively working to grow their business and address challenges.

Jackson Hewitt Rises in Its Off Season

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