H&R Block Squarely Valued

We reiterate our Hold rating on shares of H&R Block, Inc. (HRB - Analyst Report) following the release of solid Q3 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. Though the company posted solid results in the 3rd quarter, we note that the 4th quarter is annually the most critical to the company's overall results, accounting for roughly 60% of annual revenues and well over 100% of annual earnings.

We expect that the company's share price may be subject to political-related pressures going forward. A simplification of the tax code would, in our opinion, likely put pressure on HRB's operations and share price. Therefore, we maintain our Hold rating on shares of HRB, with a price target of $19.50, equating to approximately 11.5x our 2009 earnings estimate.