Stock to Avoid: Zep, Inc. - Analyst Blog

Zacks Investment Research downgraded Zep, Inc. ( ZEP ) to a Zacks Rank #5 (Strong Sell) on Jul 12, 2014. Going by the Zacks model, companies holding a Zacks Rank #5 have strong chances of performing worse than the broader market.

Why the Downgrade?

Market sentiments remained weak for Zep Inc. after the company reported its third-quarter fiscal 2014 (ended May 31) results on Jul 10. Since then, the share price has fallen 6.1%, while earnings estimates have been revised downwards, clearly depicting a gloomy outlook for fiscal years 2014 and 2015. A brief discussion on the company's results is provided below:

Zep Inc's adjusted earnings came in at 39 cents per share, up 14.7% year over year and 2.6% above the Zacks Consensus Estimate of 38 cents. Despite the improvement in earnings, quality of growth was poor. Revenues rose a meager 0.6% while cost of sales climbed 1.1%. Gross margin was down by 20 basis points. Long-term debt escalated 9.1% while cash flow from operating activities in the nine months ended May 31, 2014 shrunk 58.4%.

Over the last seven days, the Zacks Consensus Estimate for Zep Inc. has decreased by 2.7% to 36 cents for fiscal fourth-quarter, 4.0% to 97 cents for fiscal 2014 and 4.2% to $1.13 for fiscal 2015. Lowered estimates have made us doubtful about the company's performance in the quarters ahead. Currently, the company has an Earnings ESP of -8.3% for fourth quarter, -7.2% for 2014 and -8.0% for 2015.

Other Stocks to Consider

Zep, Inc. has a market capitalization of $389.1 million. Some better-ranked stocks in the industry include Green Plains Inc. ( GPRE ), Minerals Technologies Inc. ( MTX ) and NL Industries Inc. ( NL ). All these stocks sport a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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