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Zacks financial services analyst Sean P. Smith maintains his Sell recommendation to tax and investment consultants H&R Block (HRB). Here's what he had to say:
'We maintain our Sell rating for HRB following the Q2 conference call. Numerous issues continue to surround the company, including concerns related to liquidity, federal regulation, discontinued operations, refinancing arrangements, and Congressional legislation, all of which could have significant impacts on the company's operations. While the company is showing signs of improvement, many uncertainties remain, both resulting from the deterioration in the mortgage market and related to the company's core tax business.
'Given the significant number of uncertainties that continue to surround the company, we do not believe that significant near-term stock price appreciation is warranted. Over the last five years, the shares of H&R Block have traded within a range of 10x and 20x forward twelve-month earnings.
'While we view the termination of mortgage originations and the potential sale of the company's servicing business as a long-term positives, we expect that the stock should trade nearer the lower half of this historical multiple range. Currently, the shares trade at approximately 15.8x our 2008 EPS estimate.
'The Option One sale did indeed fall apart. The company initially stated, when announcing the intention to dispose of Option One, that it expected to receive proceeds of $1.3 billion in the sale. After signing the sale agreement with Cerberus, management expected to receive proceeds of approximately $1 billion. After the turmoil in the sub-prime market this year, however, the company was ultimately unable to dispose of the Option One business, and has now taken steps to terminate all loan origination activities.
'Until the picture regarding these issues becomes clearer, we would not recommend that investors initiate new positions in shares of HRB. Given the near-term issues, we maintain our sell rating, with a six-month target price of $16.50, equating to approximately 14 x our 2008 earnings estimate.'
Read the full analyst report on HRB.
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