Monthly Archives: June 2016

Zumiez: Zacks’ Bear of the Day Play

The traditional retail apparel segment continues to lose customers to online market giants like,, and even   These online behemoths are dominating the market and squeezing out the more traditional brick and mortar stores.  While these retail stores are building out their online presence, it looks to be too little too late.  The online giants are eating into the profit margins of stores like Zumiez (ZUMZAnalyst Report) , who is the Zacks Bear of the Day.

This Zacks Rank #5 (Strong Sell) is a leading specialty retailer of action sports related apparel, footwear, equipment and accessories. Their stores cater to young men and women between ages 12-24, focusing on skateboarding, surfing, snowboarding, motocross and BMX.

Q1 Earnings Below Expectations

In their most recent earnings report, the company posted year over year Q1 (ending April 30) losses in net sales -2.6%, comparable sales -7.5%, and posted a net loss of $2.1 million after posting a net gain of $2.8 million in Q1 15.  To add to the company’s recent difficulties, management stated that May 2016 net sales fell -2.9%, and the company’s comparable sales fell -7.6%.

Because of the less than expected sales numbers, management decreased Q2 16 guidance for comparable sales to a range from -6% to -8%, which was below expectations of -2%.  Further, management guided down EPS for Q2 from an expected $0.06 to a range of -$0.09 to -$0.13.

According to Rick Brooks, CEO, “While our monthly comparable sales trends improved as the quarter progressed, the quarter was more challenging than expected. We did experience pockets of strength within our merchandise assortments, however it wasn’t enough to offset the general weakness in consumer demand for our major categories. During this period of instability for the retail industry, we are taking actions aimed at preserving near-term profitability while continuing to make the necessary investments in the business to best position the company for future success. We remain confident that we have the right strategies in place to capitalize on the domestic and international growth opportunities that lie ahead and return greater value to our shareholders over the long-term.”

Price and Consensus Graph

As you can see in the price and consensus graph below, earnings estimates, and price levels have been dropping since the first quarter 2015.

Declining Estimates

Due to the poor Q1 performance, and subsequent downgrade in guidance, earnings estimates for Q2 16, Q3 16, FY 16 and FY 17 have all seen negative revisions over the past 30 days.  Q2 16 fell from $0.07 to -$0.10, Q3 16 dropped from $0.40 to $0.32, FY 16 slipped from $0.99 to $0.75, and FY 17 tumbled down from $1.18 to $0.97.

Bottom Line

The retail apparel segment has been struggling for quite some time now, and the increased competition by the likes of Amazon, and other online retailers is making it difficult for brick and mortar stores to post profits of late.

If you are inclined to invest in the Retail-Apparel/Shoe segment, it would be wise to look into Christopher & Banks Corp (CBKSnapshot Report) , currently carrying a Zacks Rank #1 (Strong Buy), Childrens Place (PLCESnapshot Report) , currently carrying a Zacks Rank #2 (Buy), or Destination XL (DXLGSnapshot Report) , who also holds a Zacks Rank #2 (Buy).

Note: Want more articles from this author? Scroll up to the top of this article and click the FOLLOW AUTHOR button to get an email each time a new article is published.


Nucor Corp: Zacks’ Bull of the Day Play

The construction sector is currently expected to see earnings growth +8.9% year over year in the second quarter of 2016.  This expectation was further bolstered with the recent US construction report that stated overall growth is expected to average +6% annually into 2020 with expenditures totaling $1.5 trillion.  Specifically, nonresidential building segment is expected to see annual growth of +7.7%, and spending on nonresidential building construction is expected to rise an average +4.9% per year through 2020. One company that is highly leveraged to the nonresidential construction market, Nucor Corp (NUEAnalyst Report) , is our Zacks Bull of the Day.

This Zacks Ranked #1 (Strong Buy) company manufactures and sells steel products. Principal steel products are hot-rolled steel (angles, rounds, flats, channels, sheet, wide-flange beams, pilings, billets, blooms and beam blanks), cold-rolled steel, cold finished steel, steel joists and joist girders, steel deck, steel fasteners and steel grinding balls. Nucor is the largest recycler in the United States. Nucor and affiliates are manufacturers of steel products, with operating facilities in fourteen states.

Earnings and Increased Second Quarter Guidance

Management reported Q1 16 earnings in late April where they beat the Zacks consensus revenue estimate, but came in below the Zacks consensus earnings estimate.   The company saw year over year gains in net earnings +4.4%, total tons shipped +9%, total steel mill shipments +16%, overall operating rates at the steel mills +74%, and total steel mill energy costs declined $7 per ton compared to the year ago quarter.

Then in mid-June management announced guidance for Q2 16 earnings; they expect earnings to be in a range of $0.65 to $0.70 per diluted share compared to Q2 15 earnings of $0.39 per diluted share.  Management expects to see improvements in the steel mill segment and their downstream products segment.

Management’s View

According to management, “We expect earnings in the second quarter of 2016 to be significantly improved from the first quarter of 2016. Performance of the steel mills segment is expected to improve in the second quarter of 2016 as compared to the first quarter of 2016 as recently announced price increases for many of our products are being accepted in the market. This improved performance by the steel mills segment in the second quarter of 2016 will be tempered by rising scrap prices.  We expect increased profitability for our downstream products segment in the second quarter of 2016 as compared to the first quarter of 2016 due to seasonal factors as improving weather conditions benefit nonresidential construction markets. The performance of the raw materials segment is expected to improve in the second quarter of 2016 as compared to the first quarter of 2016 due to improved pricing at both our scrap processing businesses and DRI facilities.”

Performance vs. S&P 500

As you can see in the graph below, NUE has been outperforming the S&P 500 for the past 5 months.

Increasing Guidance

Due to management’s new guidance for Q2 16, and their positive outlook past Q2, consensus earnings estimates for Q2 16, Q3 16, FY 16 and FY 17 have all risen in the past 30 days.  Q2 16 rose from $0.57 to $0.70, Q3 16 improved from $0.76 to $0.86, FY 16 jumped up from $2.04 to $2.49, and FY 17 moved up from $2.89 to $2.97.

Bottom Line

As investments in nonresidential construction improves the need for Nucor’s steel products will continue to be in high demand out through 2020.    This consistent demand coupled with management’s focus on operations (improvement in steel mill and downstream products segments), and expense cutting (estimated LIFO expenses are expected to decline by $8.5 million between Q1 16, and Q2 16) have this steel company rolling through 2016.

Note: Want more articles from this author? Scroll up to the top of this article and click the FOLLOW AUTHOR button to get an email each time a new article is published.

American Railcar: Zacks’ Bear of the Day Play

American Railcar Industries, Inc. (ARIISnapshot Report) is heading into the rail car down cycle this year and next. This Zacks Rank #5 (Strong Sell) is expected to see falling sales and earnings over the next two years.

American Railcar makes and sells railcars, specifically hopper and tank cars, custom designed railcar parts and other industrial products. It also leases railcars it manufactures to some markets.

Additionally, the company provides railcar repair services through various repair facilities.

Earnings Miss in Q1

On Apr 28, American Railcar reported first quarter 2016 results and missed the Zacks Consensus by 16 cents. Earnings were $1.16 versus the consensus of $1.32.

Revenue fell 33% to $176.2 million from $263.8 million for the year ago quarter. It was driven mostly by lower manufacturing revenue.

It was producing more hopper railcars in the quarter. Hoppers have lower average selling prices than tank railcars due to less material and labor content.

Tank railcars, which are often used by the energy industry, continues to be in a soft market, with decreasing sales.

One bright spot, however, was railcar leasing. Revenue rose 33% to $32.8 million year over year due to an increase in the number of railcars on lease.

As of March 31, 2015, there were 10,556 railcars in its lease fleet, up from 8,381 the year before.

The backlog remains substantial, with 5,958 railcars, with an estimated value of $569.1 million as of March 31, 2016.

Earnings and Sales Expected to Decline

2015 was a record year for American Railcar, as earnings jumped to $6.46 a share. The railcar business is cyclical, however. With tank car orders softening, sales and earnings are now expected to slide.

Analysts expect 2016 revenue to fall 29% year over year with another decline of 23% in 2017.

The 2016 Zacks Consensus Estimate has fallen to $4.23 from $4.64 in the last 90 days. That is a decline of 35% from 2015’s record year.

Earnings are expected to fall another 26% in 2017 to $3.12.

What About That Dividend?

American Railcar pays a dividend which is currently yielding 4.1%.

As of March 31, the company had working capital of $267.9 million, including $208.1 million in cash and cash equivalents. The dividend in the first quarter only cost $7.8 million.

Because of its solid cash flow, it has also been buying back shares. In Q1, it bought shares worth $10.9 million and is authorized to buy another $181.7 million under its current share buyback authorization.

Shares Have Sunk But Be Careful

Over the past 2 years, shares have sunk from their highs.

Shares appear cheap, with a forward P/E of just 8.7.

But with sales and earnings both expected to see double digit declines over the next two years, this is a classic case of a value trap.

Shares appear cheap but there’s no growth. Investors are rewarded for their patience by the dividend. But until earnings turn around, there are other places you can park your money and get growth and value.

I don’t like any of the railcar manufacturers right now. They are all in the same situation with declining railcar sales.

But if you still really want to invest in the transports, you might consider Ryder (RAnalyst Report) instead. It’s a Zacks Rank #3 (Hold) and still pays a nice dividend of 2.9%. It’s also cheap with a forward P/E of only 9.3.

Ryder is expected to grow earnings this year and next.

Want More of Our Best Recommendations?

Zacks’ Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Then each week he hand-selects the most compelling trades and serves them up to you in a new program called Zacks Confidential.

Learn More>>

Tracey Ryniec is the Value Stock Strategist for She is also the Editor of the Insider Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec and she also hosts the Zacks Market Edge Podcast on iTunes.

TopBuild: Zacks’ Bull of the Day Play

TopBuild Corporation (BLDSnapshot Report) is cashing in on the hot housing market. This Zacks Rank #1 (Strong Buy) is expected to grow earnings by the double digits both this year and next.

TopBuild is the largest purchaser, installer and distributor of insulation in the United States. It distributes through TruTeam which has 175 branches in 40 states.

It also distributes insulation through Service Partners from 70 branches in 33 states.

The company is a small cap, with a market cap of $1.3 billion.

3 Earnings Beats in a Row

On May 11, TopBuild reported first quarter results and beat the Zacks Consensus for the third straight quarter. Earnings were $0.31 compared to the Zacks Consensus of just $0.15 for a massive 106% beat.

A mild winter, which boosted the housing construction market, aided sales in the quarter.

Net sales rose 15.5% to $414 million year over year.

Historically, the first quarter is the slowest of the year and even though it was a hot quarter, the company still expects it to remain that way this year. But given how hot it was, the swing in seasonality might not be as strong in future quarters.

However, it still expects business in the remainder of the year to remain strong.

“From a macro perspective, we believe the U.S. housing recovery will continue for the next several years,” said Jerry Volas, CEO.

“Although we expect that TopBuild will certainly be advantaged by that, we intend to outperform that recovery with organic growth and strategically selective acquisitions in both the residential and commercial space. Additionally, we believe that continued improvements in operating efficiency will optimize the impact of this expected growth on operating margins,” he added.

Earnings Estimates Rise

Given the positive sentiment from TopBuild, it’s not surprising that the analysts are bullish as well.

2 estimates were raised for 2016 in the last 60 days which pushed the Zacks Consensus up to $2.02 from $1.80.

That is earnings growth of 51.8% over 2015 which saw earnings of only $1.33.

The growth is expected to continue into 2017. Analysts see further earnings growth of 17.3%.

Shares Rebound Off Winter Lows

Shares have soared off the winter lows but they’re still trading at attractive valuations.

TopBuild has a forward P/E of 16.9. The average P/E of the S&P 500 is 17.5.

For those looking for a way to play the hot housing market without buying the homebuilders, TopBuild is one to keep on your short list.

Now, which stocks should you sell?

As a Zacks Rank #1 Strong Buy, this Bull of the Day deserves consideration. But today there are 220 Zacks Rank #5 Strong Sells that demand even more urgent attention. If any of these are lurking in your portfolio, they should be removed immediately. Since 1988, such stocks have actually performed more than 11X worse than the S&P 500.

See all Zacks Strong Sells and Strong Buys absolutely free >>.

Want More of Our Best Recommendations?

Zacks’ Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Then each week he hand-selects the most compelling trades and serves them up to you in a new program called Zacks Confidential.

Learn More>>

Tracey Ryniec is the Value Stock Strategist for She is also the Editor of the Insider Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec and she also hosts the Zacks Market Edge Podcast on iTunes.

Fluor Corporation: Zacks’ Bear of the Day Play

Fluor Corporation (FLR) delivers engineering, procurement, construction, maintenance (EPCM), and project management to governments and clients in diverse industries around the world. The Texas based company operates in five segments: Oil & Gas, Industrial & Infrastructure, Government, Global Services, and Power. Fluor is a primary service provider to the United States Federal Government. It performs operations and maintenance activities for major industrial clients, and also operates and maintains their equipment fleet.

The company has a market cap of $7.2 Billion and has a Forward PE of 15. The stock sports a Zacks Style Scores of “D” in Momentum.  The company has 3-5 year growth rate of 14.00% and dividend yield of 1.63%. However, a recent guidance cut with the combination of earnings revisions heading lower make the stock a Zacks Rank # 5 and today’s Bear of the Day.


Fluor reported Q1 earnings on May 5th, seeing EPS at $0.85 verse the $0.86 expected. The company saw a slight beat on revenue, seeing $4.42 Billion verse the $4.41 Billion expected. In addition the company cut fiscal year 2016 guidance range to $3.25-3.65 verse the $3.65 expected. The previous range was $3.50-4.00.

The stock fell 8% on the news and has since grinded back close to pre earnings levels. Investors would be wise to sell shares due to falling earnings estimates for the rest of the year. The danger being that shares could dip back below $50/shares and challenge 2016 lows around $40.


Over the last 60 days, the Fluor has seen estimates fall for both fiscal year 2016 and 2017. For the current year we have seen a 7.3% revision lower from $3.65 to $3.38. For next year, estimates have fallen 4.3%, from $3.68 to $3.52.

The upcoming quarters are also seeing revisions lowers, which doesn’t bode well for the company when it reports on August 4th.

A Better option

If investors want exposure to the engineering, research and development space they would be better off with Willdan Group (WLDNSnapshot Report) , a Zacks Rank # 2 (Buy). The Anaheim based company is a leading single resource provider of specialized outsourced services to small and mid-sized public agencies located primarily in California and other western states.The company has a low market cap of $86 million and sports a Zacks Stlye Score of “B” in Value.

Willdan reported an EPS beat on May 5th and estimates for both the current year and next year. The stock is up over 50% from its 2016 lows. The company reports Q2 earnings on August 11th.

Note: Want more articles from this author? Scroll up to the top of this article and click the FOLLOW AUTHOR button to get an email each time a new article is published.

Baxter International: Zacks’ Bull of the Day Play

Baxter International (BAXAnalyst Report) engages in the worldwide development, manufacture and distribution of a diversified line of products, systems and services used primarily in the health-care field. The company provides a portfolio of hospital and renal products that service to treat end-stage renal disease, irreversible kidney failure, and acute kidney therapies. The company’s products are used by hospitals, clinical and medical research laboratories, blood and dialysis centers, rehabilitation centers, nursing homes, doctors’ offices and by patients, at home, under physician supervision.

Baxter has posted positive earnings and has seen rising estimate revisions, which has helped the stock rise 18% higher year to date. The Deerfield, IL based company recently became a Zack Rank #1 (Strong Buy) making the stock the Bull of the Day.

Baxter has a market cap of $25 Billion with a Forward PE of 27. The company pays a dividend yield of 1.16% and has an expected 3-5 year EPS growth rate of 8.65%. Over the last two years the stock has outperformed the S&P 500 by returning almost 17% versus 6%. Most of this return has been in 2016, a time when most stocks are struggling to move higher. This outperformance in such a dull market says a lot about the strength of the stock and future price direction if equities were to finally breakout.


Baxter reported Q1 earnings on April 26th seeing $0.36 versus $0.29 expected. Revenue came in at $2.4 Billion verse the $2.34 Billion expected and the company guided Q2 $0.38-0.40 versus the $0.35 expected. Baxter also raised fiscal year 2016 to $1.59-1.67 verse the $1.50 expected.

CEO Jose Almeida had some comments on the quarter: “Our new strategic framework focused on portfolio optimization, operational excellence and capital allocation is driving improved performance throughout the organization and is reflected in our increased financial outlook for the year.

While the news wasn’t enough to push the stock much higher following earnings, the stock is up almost 5% since last quarter’s report. The company’s next report will be August 3rd, and earnings revisions are looking positive.

Earnings Estimates

Earnings estimate revisions for both fiscal year 2016 and 2017 are headed higher, suggesting the stocks earnings momentum will continue. Over the last 60 days, Baxter has seen at least six analysts give upward revisions for the current quarter, next quarter, current year and next year.

For fiscal year 2016, estimates over have gone from $1.50 to $1.63 over the last 60 days, a bump of 8.6%. For the same time period, fiscal year 2017 has seen a 7.9% jump, from $1.76 to $1.90. If Baxter surprises to the upside on these numbers, look for the stock to continue the upward momentum it has seen so far in 2016.

EPS Beats

Baxter has a strong history of surprising to the upside. Since 2012 the company has never missed, so look for another beat on August 3rd. More important than an EPS beat is stock direction after earnings. The last three beats have caused the stock to head higher, a good sign that investors are following the fundamentals.

Fresh News

News out yesterday gave the stock a positive bump in early trading.  A study conducted by Baxter indicates healthcare systems in the United Kingdom, Germany, Italy and Spain see value in supporting remote monitoring technology for chronic health conditions, including end-stage renal disease (ESRD). The study indicated that remote monitoring may improve access to care, decrease hospitalizations and reduce treatment costs by helping healthcare professionals manage patient’s treatments and improve adherence.

In Summary

Baxter allows investors exposure into the medical products space with consistent earnings momentum. Considering the stock’s recent strength Baxter looks to be a good investment for the rest of 2016 if stocks break out to all time highs.

Note: Want more articles from this author? Scroll up to the top of this article and click the FOLLOW AUTHOR button to get an email each time a new article is published.

Confidential from Zacks

This week, Zacks researchers have named 7 other stocks that look to break out even sooner than today’s Bull of the Day. You can see these time-sensitive tickers free, and access additional trades that are not available to the public. Simply click here >>.

PotashCorp: Zacks’ Bear of the Day Play

Saskatoon, Saskatchewan based PotashCorp (POTAnalyst Report) is the world’s largest fertilizer company by capacity. It produces potash, nitrogen and phosphate–the primary crop nutrients required to  maintain healthy and productive soils. They have operations in seven countries and their products are sold throughout the world, including North American, Asian and Latin American markets.

Weak Q1 Results and Lower Guidance

The company earned $75 million in the first quarter, down from $370 million in the same quarter, a year earlier. According the management, lower prices for fertilizers—primarily for potash and nitrogen–impacted results and led to a more subdued outlook.

Revenues for the quarter plunged 30% year over year to $1,076 million and missed the Zacks Consensus Estimate of $1,254 million. Adjusted EPS of $0.15 per share was a penny short of the Zacks Consensus Estimate, the company’s fifth consecutive miss as you can see from the following chart:

They now expect full-year 2016 earnings to be in the range of $0.60-$0.80 per share.

Industry Outlook—Short Term Outlook Remains Weak

Global population and the need for food are rising rapidly. Further, the demand for better quality food is surging with rising middle class in many developing countries. As most of the population growth is in countries where there is little room for expansion of arable lands, the need for fertilizers and other resources used for increasing crop yield will also continue to increase.

Thus looking at the longer-term, there is a case for investing in agriculture and fertilizer stocks. But the near-term outlook remains cloudy due to oversupply, weak demand and falling prices.

According to Zacks Industry Outlook, “potash prices, which are already at their lowest levels since 2007, remain under pressure due to elevated supply. The potash market is expected to remain oversupplied in the near future, thereby hurting prices. Moreover, depressed global energy prices and higher supply have also contributed to a softer nitrogen pricing environment.”

The Bottom Line

In addition to Zacks Rank #5 (Strong Sell), the company has Style Scores of “D” for Value, Growth and Momentum, resulting in a VGM Score of “F”. Further, the Zacks Industry Rank of 246 out of 265 (bottom 7%) indicates significant chances of underperformance in the short to medium term.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 DaysClick to get this free report >>

B&G Foods: Zacks’ Bull of the Day Play

Food stocks are hot this year as investors like their safety and high dividends in the current uncertain and ultra low rate environment. B&G Foods (BGS) is a food products company with a huge portfolio of well-known brands. They manufacture and market processed and packaged foods across the United States and Canada.

Solid First Quarter Results and Improved Guidance

The company reported excellent results for Q1. Gross profit surged 72% to $115.9 million from $67.4 million a year ago, primarily driven by the acquisition of Green Giant brand. The brand was purchased from General Mills in September last year.

After strong results they also raised their 2016 outlook. They now expected adjusted EPS to be in the range of $2.05 to $2.15. The stock hit its all-time high after results.

Soaring Estimates

After excellent results and upgraded guidance, analysts have raised estimates for the company. Zacks Consensus Estimates for the current and the next year are now $2.12 per share and $2.24 per share respectively, up from $1.92 and $2.02, before the results.

The following chart shows earnings and price momentum:

Returning Cash to Shareholders

The stock has a very juicy dividend yield of 3.75% as of now. Earlier this year they increased their quarterly cash dividend by 20%.   This was 46th consecutive quarterly dividend since their IPO in October 2004.

The Bottom Line

The company continues to grow organically and through acquisitions. In the past 20 years, they have acquired more than 40 brands. They have an excellent record ofturning around such heritage brands after acquiring them.

In addition to a top Zacks Rank #1 (Strong Buy), the stock enjoys the Zacks Industry Rank of 44 out of 265 (top 17%) and the Style Score of “A” for Growth.
While shares are definitely not cheap after the recent run-up, the company has a much higher growth potential compared to most peers. Further, in the current uncertain environment, it makes sense to increase portfolio allocation to defensive industries like food. And with interest rates expected to stay lower for longer, stocks with attractive dividends will likely remain in favor.

Want the latest recommendations from Zacks Investment Research? Today, you can download7 Best Stocks for the Next 30 Days.Click to get this free report >>

Are we heading into a bear market? (1st line listed as the headline)             Today’s Bull of the Day is a promising buy for the present. But history shows that overall bull markets don’t last forever, and the current one could well be on its last legs. When the bear last struck, the market lost 58% of its value. The time to protect yourself is NOW. Today Zacks offers a free Bear Market Game Plan to help you prepare for the looming downturn and pursue big profits when it hits. Download it now for free >>

Skyworks Solutions: Zacks’ Bear of the Day Play

Skyworks Solutions (SWKSAnalyst Report) has finally slipped to a Zacks #5 Rank (Strong Sell) after earnings estimates for next year dropped 11.8% in the past two months since the company’s April 28 report.

The Zacks consensus for fiscal year 2017 (ending Sep 2017) was knocked down from $6.53 to $5.76 when three analysts lowered their profit projections. This is still 13% EPS growth, but it’s part of a trend for the company’s outlook that puts even the most recent estimates in jeopardy.

Below is the proprietary Zacks Price & Consensus chart to show that trend of falling earnings projections for the past year.

It’s not a pretty picture of earnings momentum.

So what’s eating the key supplier of RF (radio frequency) chips to the global Internet of Things?

In a word, the iPhone.

Since Skyworks depends on as much as 30% of its sales to Apple (AAPLAnalyst Report) , the slide in iPhone unit growth has taken Skyworks earnings with it.

And even though the launch of the new iPhone 7 later this year is expected to boost Apple sales respectably, the jury is still out for suppliers as caution about future projections becomes the operative word.

Until the estimates picture turns around for Skyworks, it may be best to stay on the sidelines for a quarter or two. The Zacks Rank will let you know when it’s safe.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money

Zendesk: Zacks’Bull of the Day Play

Zendesk (ZENSnapshot Report) is a $2.5 billion software-as-service company that provides a customer service platform to small and medium-sized businesses and large enterprises.

The company offers applications that allow clients to manage incoming support requests from end customers from any Internet connected computer.

You may have encountered Zendesk contact forms or chat windows on sites like Trivago, Dropbox, Groupon (GRPNAnalyst Report) , Vodafone (VODAnalyst Report) and parts of the Expedia Affiliate Network.

And you may see the profile of Zendesk rise even higher as the largest Silicon Valley IPO of the year, Twilio (TWLO), is also one its customers.

Meditate On This

Zendesk provides customer service through its platform in approximately 40 languages to customers in various industries, such as business technology, telecommunications, education/non-profit, consumer technology, media/entertainment, and retail/ecommerce.

Other customers include Redfin, the upstart real estate broker leveraging the web, FourSquare, the mobile-social-restaurant mash up, and the Wharton School which uses Zendesk’s iPad app to allow their IT team to answer tickets on the go.

Zendesk is projected to hit $300 million in revenue this year and analysts at investment bank William Blair, after recent meetings with management, are confident the company can meet its goal of $1 billion in sales by 2020.

Hello Twilio

I suspect that the Wall Street debut of Twilio will significantly raise the profile of Zendesk as they dwell in similar technologies like voice recognition and activation.

Here’s the Twilio company description from…

Twilio provides a cloud communications platform that enables developers to build, scale, and operate communications within software applications through the cloud as a pay-as-you-go service in the United States and internationally. It offers programmable communications cloud software that enables developers to embed voice, messaging, video, and authentication capabilities into their applications through application programming interfaces (API).

And here’s a more hands-on way that Zendesk describes their customer and what they do for them…

“Twilio is a cloud-based communications company that provides its 40,000 customers—a mix of developers and non-developers—with basic building blocks for building voice and text messaging capabilities into their web apps, regardless of their level of technical experience.

“Most of Twilio’s customers begin with trial credit and then start hacking away. It is only when they have built something useful that they decide to invest more in Twilio. So it is critical that the company’s support team helps all of its customers building something as quickly and seamlessly as possible, otherwise it’s a bad reflection on how easy Twilio is to use.”

Given this context, Twilio could IPO at less than half the value of Zendesk. Twilio said in its updated IPO prospectus last week that it plans to sell 11.5 million shares at a preliminary range of $12 to $14, placing its market capitalization as high as $1.15 billion. The company’s last private investors paid $11.31 a share in 2015.

According to Lauren Thomas writing on, “San Francisco-based Twilio has grown rapidly — 88 percent last year — by selling software that helps companies communicate with their customers using voice, video and messaging in anonymized fashion. For example, OpenTable uses Twilio to send reservation notifications, while the technology lets Nordstrom (JWNAnalyst Report) salespeople chat with customers who are waiting for a specific product to arrive.

“Uber is also a big client. The ride-hailing company facilitates one-on-one conversations between drivers and riders without divulging personal phone numbers. Airbnb does the same for hosts and guests.”

Pricey By Any Measure

Zendesk trades at over 8 times this year’s projected sales. The company is also not profitable and not expected to be so any time soon.

This year’s projected earnings are -$1.20 which represents a 27.66% loss vs. last year. And 2017 profit estimates call for -$1.27.

Why is the stock a Zacks #1 Rank then? Because it’s the direction that recent estimate revisions are moving that count. And that 2016 estimate of -$1.20 is up from -$1.29, while the 2017 number is up from -$1.40.

And investors have rewarded the company for this improved outlook by moving shares 20% higher since their May 3 earnings report. It also helped that the company hosted an analyst day in mid-May where management detailed their long-term targets, including gross margins of 75% to 77% by 2020 and non-GAAP operating margin of 8% to 12% by 2020.

William Blair analysts had this to say after the analyst day…

“We believe the company’s transition to modular-product offerings will allow it to attract a wider customer base and increase its average selling price across both smaller customers and enterprise organizations. Further, we believe the market for customer services remains large and underpenetrated. In our opinion, Zendesk is well positioned in the market as more organizations are now competing on customer service — driving continued adoption for the company’s products.”

While the stock is certainly no bargain, and trades at a definite premium to many of its software-as-service and cloud peers, Zendesk is one to buy on pullbacks near $20. But it’s quite possible that somebody else scoops them up all at once in a very hot industry.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.

Now see our private trades

Today’s Bull of the Day is a promising buy that we’re sharing with the public. Now would you like to look behind the curtain and view all our private portfolios? Starting today, for the next month, you can follow them in real time from value to momentum . . . from stocks under $10 to ETF and option plays . . . from insider trades to companies that are about to report positive earnings surprises (we’ve called them with 80%+ accuracy). You can even be privy to portfolios so exclusive that they are normally closed to new investors. Click here for all Zacks moves >>