Tax preparation firm H&R Block Inc (NYSE:HRB) will step into the earnings limelight after the close tomorrow amid some rather mixed expectations. For the record, Wall Street is expecting H&R Block to post a third-quarter loss of 28 cents per share.
However, estimates have risen heading into the event, with some analysts targeting a profit of a penny per share for HRB stock.
Historically, there is reason for uncertainty ahead of H&R Block’s quarterly report. During the past four quarters, HRB has bested the consensus estimate twice and missed twice. Still, that hasn’t shaken the bullish resolve in the brokerage community.
Specifically, data from Thomson/First Call reveals that HRB stock has garnered eight “buy” ratings, compared to one “hold” and no “sell” ratings. Still, the 12-month price-target of $37 represents a meager premium of just 8.22% to yesterday’s close, leaving some wiggle room for price-target increases.
Turning to the options front, there is a sharp demarcation between short-term options traders and longer-term traders. For instance, the March put/call open interest ratio currently rests at a weighty 3.47, with puts more than tripling calls among options set to expire in the next month.
Meanwhile, the April/March put/call open interest ratio plunges to 0.69, with calls nearly doubling puts. Clearly there is a fair amount of uncertainty within the options crowd.
Click to Enlarge Overall, March option implieds are pricing in a potential post-earnings move of 5.5% for HRB stock. This places the upper bound at $35.89, with the lower bound arriving at $32.11.
A rally would send HRB stock back above its major daily moving averages, while a retreat could send the stock back below its 50-day moving average, resulting in additional follow-through selling pressure from the technical trading crowd.
2 Trades for HRB Stock
Call Spread: Those traders looking to side with analysts and back-month options traders might want to consider the Apr $35/$36 bull call spread. At last check, this spread was offered at 33 cents, or $33 per pair of contracts. Breakeven lies at $35.33, while a maximum profit of 67 cents, or $67 per pair of contracts, is possible if HRB closes at or above $36 when April options expire.
Put Spread: On the other hand, if you’re more inclined to side with short-term options traders on HRB’s outlook, then a Mar $33/$34 bear put spread could be a better choice. At the close last night, this spread was offered at 19 cents, or $19 per pair of contracts. Breakeven lies at $33.81, while a maximum profit of 81 cents, or $81 per pair of contracts, is possible if HRB stock closes at or below $33 when March options expire.
Finally, this trade will realize a double at $33.62 and a triple at $33.43, so be sure to set a limit order ahead of time to lock in profits.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
