Jackson Hewitt Tax Service, Inc. (NASDAQOTH:JHTXQ)

CAPS Rating: 3 out of 5

The Company provides computerized preparation of federal, state and local individual income tax returns in the United States through a nationwide network of franchised and company-owned offices operating under the brand name.

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Player Avatar NetscribeFinServ (< 20) Submitted: 4/26/2007 2:37:27 AM : Underperform Start Price: $26.56 JHTXQ Score: +142.45

The United States Department of Justice has filed civil injunction suits against five corporations that operate Jackson Hewitt tax preparation franchises and also on 24 individuals who manage or work at the franchises. Allegations were that of preparing fraudulent tax return preparation for claiming refunds with managers and employees receiving kickbacks from customers for helping in the same. The situation would not affect the 2007 earnings as the major tax preparation season is over and not a single investigated franchisee account for more than 2% of the total revenue. Not much is written against the company Jackson Hewitt in the injunction and moreover it limits itself to providing marketing, brand support, software and technology taking less interest in the day-to-day activities of its franchisees. However its brand reputation has been damaged apart from its stock price taking a hit. The company has launched its own internal investigation as part of damage control and halted operations in the franchisees.

It is facing problems from all quarters and its counterpart HSBC and Pacific Capital Bancorp has announced their intention of quitting pre season loans in the sub prime loan market owing to excess regulation. Though the segment account for approximately 30% of the company’s revenues it is responsible for the company’s major profitability. Endorsing the same total revenues for the latest quarter increased 20% to $114 million with financial product fees growing by 76%. The biggest bombshell was its decision to call off the preseason loan products like Holiday express and Enhance money product launched with much fanfare apart from determining its future valuation. Summarizing the above mentioned facts, the future of the company looks uncertain, thereby not stimulating the bullish sentiments.

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