Keeping Our Sell on H&R Block

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.'

GM Cuts Hurt American Axle

Hold recommendation has recently been issued to auto parts manufacturer American Axle & Manufacturing Holdings, Inc. (AXL) by Zacks senior automobile industry analyst Paul Raman, CFA.  Here's what his latest update had to say about it:

'The company's focus on diversification and geographical expansion is helping the company to grow, but weak SUV demand is majorly impacting AXL's sales. Furthermore, high commodity costs and pricing pressure from original equipment manufacturers (OEMs) remain causes for concern.

'Currently, AXL's stock is trading at approximately 11.0x our 2007 EPS estimate of $1.72. AXL's focus on improving its product mix, diversification of its client base, and outsourcing to low-cost countries are some of the positives associated with the stock. However, due to production cuts by General Motors (GM), pricing pressure from OEMs, and high commodity prices, we rate the stock a Hold. Using our fiscal year 2008 earnings estimate and a forward multiple of 12.2x, we value the stock at $21.00.'

Costs Pressure Kraft

Here's why senior consumer goods industry analyst Steven Ralston, CFA is maintaining his Hold recommendation on shares of Kraft Foods (KFY) at this time:

'In 2007, Kraft Foods completed its Sustainable Growth Plan, which included capacity rationalization, SKU reduction, and cost savings programs. The results being unsatisfactory, management announced a new strategy to accelerate the company's growth, which requires significant up-front investments ($500 million) this year.

'Concurrent with the new strategy announcement, the Board announced a significant $5 billion share repurchase program. Lastly, rising commodity costs, especially dairy costs, are pressuring margins. The Hold recommendation is maintained.

'Prior to June 13, 2001, Kraft was wholly owned by Altria (MO) (formerly known as Philip Morris). Since the stock offering in 2001, the current Kraft stock has traded between a 13 to 22 P/E multiple. We do not expect the stock to outperform until positive operational earnings comparisons are generated from the new restructuring plan announced in February 2007.

'Though the spin-off from Altria Group should enhance the management's operational and decision making abilities, it will also require additional costs in form of a higher tax rate and an increased number of diluted shares. The target price of $34.50 is based on a 19 P/E on trough annual earnings (our 2007 year-end earnings estimate).'

Keep Conexant at a Hold

An update has come out on Conexant Systems, Inc. (CNXT), in which senior semiconductor analyst Abdul Saleh is stating his Hold rating on the company. We excerpted the following details:

'CNXT reported revenues of $183.9 million in Q4 of fiscal 2007, down 25.2% year-over-year but up 2.4% sequentially. A non-recurring royalty of approximately $4 million led to the sequential improvement in revenues. Pro-forma gross margin was 44.7%, up 120bp sequentially, above the high-end of the 43%-44% guidance. Pro-forma operating margin was (4.3%), up 180bp from (6.1%) in the previous quarter. GAAP EPS came in at ($0.48) while pro-forma EPS was ($0.04), in-line with our estimate.

'Conexant's imaging and PC media segments were the strongest for the company in the quarter, increasing at a double-digit per cent sequentially. The company streamlined its workforce on a worldwide basis by approximately 20% and expects to reduce operating expenses by approximately $10 million per quarter in the coming quarters. Going forward, Conexant expects to return to profitability by Q1:FY08.

'Revenues are expected to be between $194 million and $196 million. Revenue in Q4:FY07 declined 25.2% year-over-year but increased 2.4% sequentially and management expects profitability by Q1:FY08. EPS is anticipated to be in the range of $0.00 to $0.01. We continue to rate the stock a Hold and maintain our six-month target price of $1.50.