Keeping Our Sell on H&R Block
We maintain our Sell rating for H&R Block (HRB). The company has signed an agreement to sell the Option One mortgage servicing business, however HRB does not anticipate that the deal will cause any significant impact on its reported income. Additionally, several conditions must be met before the deal successfully closes.
Further, the uncertainty regarding the failure to meet the minimum adjusted tangible capital required by the OTS [Office of Thrift Supervision] remains an area of particular concern. Until the picture regarding these issues becomes clearer, we would not recommend that investors initiate new positions in shares of HRB. 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 as a long-term positive, we expect that the stock should trade nearer the lower half of this historical multiple range. Currently, the shares trade at approximately 13.8x our 2008 EPS estimate.
ASM International Stays a Hold
ASM International (ASMI) is an OEM of both front-end and back-end semiconductor manufacturing equipment. December quarter orders were very strong, yet a majority of the orders were delivered in the recently completed fourth quarter. The back-end business has gained significant momentum in the past two years, while the front-end business has struggled to become profitable.
Although management mentioned they are open to discuss splitting up the back and front end, they now appear to be leaning toward keeping the company together. We continue to rate shares of ASMI a Hold.
The company has a unique position in the front- and back-end of the semiconductor manufacturing equipment market. ASMI has a growing presence in Asia. ASMI shares should benefit from the growth in 300mm orders, which is likely to be sustained in the foreseeable future. Capacity driven purchases have slowed, as foundry utilizations rates have started to recover.
The front-end business remains a weight on management's shoulders, however. Although back-end order strength indicates that the business will perform strongly in 2008, the shares will be constrained until the front-end is sold or becomes profitable.
Keep Neutral on Dendreon Shares
Through the use of antigen engineering and proprietary cell separation technologies, Dendreon Corp. (DNDN) develops therapeutic vaccines, monoclonal antibodies, and small molecules to treat a variety of cancers. The company's key product candidate, Provenge, received a positive opinion from the FDA expert panel on March 29, 2007.
