Liberty Tax: Why To Not Add This Stock To Your Portfolio

On Dec 16, Zacks Investment Research downgraded Liberty Tax, Inc. TAX to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Liberty Tax witnessed declining earnings estimates following weaker-than-expected fiscal second-quarter 2015 results.

Liberty Tax delivered operating loss of 74 cents per share that was wider than the Zacks Consensus Estimate loss of 72 cents as well as the year-ago loss of 60 cents. Aside from seasonality, higher losses were attributable to an increase in expenses.

The company has delivered negative surprises in three straight quarters, with an average of negative 10.27%.GAAP net loss came at 89 cents per share, also wider than net loss of 66 cents incurred in the year-ago quarter.

Expenses increased mainly on higher employee compensation and benefits, selling, general, and administrative expenses, area developer expense and advertising expense.

A higher magnitude of increase in expenses offset the increase in revenues, resulting in an operating loss of $18.2 million, wider than the year-ago loss of $13.6 million.

While cash balance plunged 90% from fiscal 2014 end level, debt level increased 2%. Stockholders' equity at quarter end decreased 36% from fiscal 2014 end level.

Liberty Tax's cash used in operations totaled $40.4 million in the quarter, higher than $27.9 million used in the year-ago quarter.

These negatives prompted a downfall in the Zacks Consensus Estimate for 2015 and 2016. The same fell 3% to $1.79 for 2015 and 11% to $2.12 for 2016.

Other Stocks to Consider

While we would like to avoid Liberty Tax at present, better-ranked business service providers include Core-Mark Holding Company, Inc. CORE, WageWorks, Inc. WAGE and Alliance Data Systems Corp. ADS. All these stocks carry a Zacks Rank #2 (Buy).