Broker snap: HMV fundamentally oversold

Preliminary results from HMV were ahead of KBC Peel Hunt's expectations and prompted the share price to rally but the near halving of the retailer's share price suggests the market has no confidence in the company's medium term prospects."HMV has long term challenges," KBC analyst John Stevenson concedes. "However, management has set out a clear strategy to develop and diversify earnings, with PBT [profit before tax] underpinned by cost savings, the new Live Division, new product categories and Waterstones' recovery," Stevenson adds.On a price/earnings ratio of less than 4 the broker believes the shares remain fundamentally oversold, and has reiterated its "buy" recommendation and target price of 110p."The final dividend has been held at 5.6p as expected, a yield of nearly 10% in its own right. Overall HMV offers a full year dividend yield of 13.1%," Stevenson notes."As ever, there is no current trading update at this announcement. However, World Cup disruption and weak video gaming market will leave underlying LFL [like for like] sales in negative territory, we suspect," the broker surmises.