Upgrading H&R Block to Hold

We are upgrading our rating on shares of H&R Block, Inc. (HRB - Analyst Report) from Sell to Hold following the release of Q4 financial results. Although the fallout from the mortgage business implosion will likely be felt for some time to come, and we continue to have significant concerns regarding other aspects of HRB’s business, we believe that negative and positive aspects of the company’s outlook are now roughly balanced.

Steps have been taken by management to refocus the company on its core tax businesses, and the emphasis on expense reduction should result in improved margins going forward. The Attorney General of Massachusetts has filed suit against HRB. We believe that this suit provides evidence that, while the company has shuttered its origination business and sold its servicing business, the operational difficulties and potential financial fallout resulting from the company’s mortgage operations may continue to be a factor going forward.

Given our outlook for future earnings, balanced against our remaining concerns regarding HRB’s ongoing business, we consider the shares to be appropriated valued near present levels. Currently, the shares trade at approximately 13.2x our 2009 EPS estimate. We are increasing our six-month target price from $20.00 to $22.00, equating to approximately 13.5x our 2009 earnings estimate.

Read the full analyst report on HRB