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Avis Budget, Kohl???s, Dropbox, ServiceNow and Veeva highlighted as Zacks Bull and Bear of the Day

Zacks Equity Research
The Zacks Analyst Blog Highlights: Plains GP, Northwest Bancshares, Prosperity Bancshares, Avis Budget and Telephone and Data Systems

For Immediate Release

Chicago, IL – July 11, 2019 – Zacks Equity Research Avis Budget Group CAR as the Bull of the Day, Kohl’s KSS asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on Dropbox, Inc. DBX, ServiceNow NOW and Veeva Systems Inc. VEEV.

Here is a synopsis of all five stocks:

Bull of the Day:

Avis Budget Group, a leading global car rental company, has positioned itself as a buy. It’s trading at multiples that are signaling a value buy with expected EPS appreciation that mirrors a growth stock. Sell-side analysts are becoming progressively optimistic about the future of this business, raising EPS estimates for the next two years and propelling this stock into a Zacks Rank #1 (Strong Buy).

Avis Budget Group operates in roughly 180 countries with a fleet of almost 650,000 vehicles. Avis, Budget, and Zipcar are some of the most recognized car rental brands in the world, all operating under the umbrella of this firm. Avis and Budget make up 92% of Avis Budget Group’s top-line, with the growing Zipcar brand driving most of the remaining 8%.

Avis Budget Group has a diverse portfolio of brands that meet a wide variety of customer needs. Avis is targeted at corporate and upscale leisure travelers, while Budget provides mid-tier options for the more judicious travelers. Zipcar is targeted at the millennial consumer who is attracted to ease and convenience, which Zipcar is able to satisfy through its easy to use app and its readily accessible cars.

Domestic sales makeup 68% of the firm’s total top-line and drive its profitability. Domestic revenues only grew 1% in 2018, but CAR’s EBITDA saw 15% growth primarily driven by per-unit fleet cost. Per-unit cost decreases should continue to expand margins as the firm realizes further economies of scale with the company’s expected expansion in the coming years.

The international side of the business, making up 32% of the top-line, is driving a good portion of the firm overall sales growth. Avis Budget Group boasted a 7% top-line appreciation in 2018, but this sizable growth comes at a cost.  Increased marketing costs combined with maintenance and damage costs have driven down margins over the past year. I expect that as this side of the business matures and develops consistent profitability will follow.

Valuation

CAR is up almost 55% since the beginning of the year and is still trading at reasonable multiples. Considering that 98% of the business is being funded by debt, EV/EBITDA is a useful metric to use. This multiple is helpful when valuing a heavily leveraged firm. CAR is currently trading at a 6.2x EV/EBITDA, which is below the industry average. CAR is being valued at a 9.5x TTM P/E, on the lowest end of its 5-year trend having traded as high as 28x and as low as 8x.

Avis Budget Group is estimated to have modest revenue growth over the next two year but expected to exhibit double-digit bottom-line appreciation.

Take Away

Avis Budget Group is putting its best foot forward in its attempt to remain competitive in the fast-changing transportation space. CAR is teaming up with innovative leaders like Lyft (LYFT) and Google’s (GOOGL) Waymo to maintain their competitive edge.

CAR’s exciting growth expectations and its equitable multiples combined with increasingly optimistic analyst expectations indicate to me that this stock is a solid buy. Before putting a position on consider the massive amount of debt financing that could add to this stock’s risk and volatility.

Look for analyst estimates to be confirmed or rejected in the upcoming earnings release on August 8th.

Bear of the Day:

The department store segment has taken a beating over the last few years with this year only exacerbating the issue. Kohl’s is no expectation to this trend, having lost 30% of its market value since the beginning of 2019. Sell-side analysts are becoming increasingly pessimistic about KSS and have been lowering EPS estimates considerably for the next couple years pushing this stock into a Zacks Rank #5 (Strong Sell).

Analysts are expecting negative growth on both the top and bottom-lines for 2019, with an 11.5% EPS estimate drop in the last 90 days. The most recent earnings results illustrated a significant miss and the start of a downward trend in sales and profitability. Millennials are now the largest consuming generation and this is creating a dynamic consumer environment that department stores have been unable to keep up with.

Millennials are a progressively online generation and aren’t walking into stores as much as they use to. This is having a significant negative impact on department stores like Kohl’s whose business model relies on brick and mortar retail.

Kohl’s most recent attempt to grow foot-traffic in their stores was the Amazon Returns program. This program is allowing Amazon customers the ability to return unwanted products to Kohl’s. Considering the extremely volume that Amazon deals with daily, this program is giving Amazon some relief from the heavy flow of goods.

The transaction is peculiar because at first glance Kohl’s is gaining nothing and it’s actually costing them more in logistics expenses because no money is changing hands. In the most recent earnings call, Kohl’s CEO Michelle Gass, confirmed this suspicion, saying that this will indeed cost Kohl’s. What they hope to gain out of this deal is foot track into their stores.

I believe that this program could easily backfire with the increased return of foot traffic not covering the logistical costs needed for a positive return on investment. These consumers are going to Kohl’s to return something not buy anything new, the likelihood of them making a purchase is much lower the traditional foot traffic from true Kohl’s consumers going there to spend.

Take Away

The outlook of the department store industry is grim with our increasingly online lifestyles. I would stay away from these investments as their core clientele is aging. Kohl’s has seen a consistent decrease in national store square footage over the past 5 years and I expect this trend to continue.

KSS has all the momentum going against it, although it is trading at multiples that are in line with the industry average. I wouldn’t put on a short position on this security quit yet, but I would limit exposure to the department store segment.

3 Cloud Stocks to Buy for July

“The Cloud” has evolved from a budding innovation in tech into one of the largest factors driving growth in the technology sector in only a few years. Today, cloud computing is an integral part of software-related firms, which in turn has seen investors search for cloud-focused tech stocks.

In our increasingly mobile world, cloud computing has dramatically reshaped the way companies conduct business. The technology allows firms big and small, as well as individuals, to access all their vital information nearly anywhere. Cloud computing like the smartphone, is hardly a fad, and it seems nearly impossible to think that people will reverse course—unless the cybersecurity concerns become too high.

Think how much market share Amazon’s AWS cloud business was able to gain based on its significant head start into the now booming market over rivals and fellow giants Microsoft, IBM and Google. With this in mind, we have highlighted three stocks that are not only showing strong cloud-related activity but also some strong fundamentals.

Check out these three Zacks buy-ranked cloud stocks to consider for July...

1. Dropbox, Inc.

Dropbox is a cloud storage firm that refers to itself as “global collaboration platform.” The San Francisco-headquarter company, which went public last March, has amassed over 500 million registered users around the globe and is working hard to convert more into paying customers, with a special focus on business clients. DBX’s paid users hit 13.2 million in Q1 2019, up from 11.5 million in the year-ago period. In early June, Dropbox announced the “biggest user-facing change” in company history that creates “one central location for all content,” including the Google Docs, Microsoft offerings, Slack and more. DBX introduced its new “Workspace” after it reported better-than-projected results last quarter and raised its full-year revenue forecast.

Shares of Dropbox have been on a bit of a roller coaster ride in 2019, but are up 24% overall so far this year and 15% in the past three months. Looking ahead, the company’s full-year fiscal 2019 revenue is projected to jump 18% to reach $1.64 billion, based on our current Zacks Consensus Estimates. The company’s adjusted 2019 EPS figure is expected to come in flat from 2018’s $0.41 per share. But DBX’s 2020 earnings are projected to surge roughly 35% above our current-year estimate to $0.56. Dropbox has also crushed our quarterly earnings estimates in the trailing four periods by an average of 65%. DBX is a Zacks Rank #1 (Strong Buy) at the moment that also sports an “A” grade for Growth and a “B” for Momentum in our Style Scores system.

2. ServiceNow

ServiceNow offers its clients the chance to digitize and automate some of their businesses and operations. The Santa Clara, California-based company’s cloud platform and solutions help with everything from IT to employee and customer workflows. Fortune ranked ServiceNow No. 3 on its “Future 50” list of global companies “with the best prospects for long-term growth” last year, behind only Weibo and Workday and ahead of giants such as Salesforce and Netflix.

The firm is coming off a better-than-expected Q1 and just announced on Tuesday an expanded partnership with Microsoft that will help ServiceNow sell to highly regulated industries and house its full SaaS offerings on MSFT’s Azure cloud. NOW stock, which hit a new high of $302.99 a share Wednesday, has skyrocketed 68% in 2019 and 334% in the past three years. Peeking ahead, the company’s adjusted fiscal 2019 EPS figure is projected to jump 28.5% on the back of 32% higher revenue. In 2020, the firm’s revenues are projected to climb 28% above our 2019 estimate to reach $4.41 billion, while earnings are expected to surge 35% higher. ServiceNow is a Zacks Rank #2 (Buy) right now and is set to release its Q2 2019 financial results on July 24.

3. Veeva Systems Inc.

Like its cloud peer, NOW, shares of Veeva Systems also hit a new high of $176.62 per share in morning trading Wednesday. VEEV, which offers cloud-based solutions for the pharmaceutical and life sciences industries, stock is now up over 94% in 2019 to destroy its industry’s 36% average climb. Veeva’s software-as-a-service model helps deliver industry-specific tools for customer relationship management, content management, and many other enterprise applications.

Moving on, Veeva’s adjusted Q2 earnings are projected to jump 25.6% on the back of nearly 24% revenue expansion. Meanwhile, the cloud company’s full-year revenue is expected to climb 21.9% to reach $1.05 billion to help earnings jump by 24.5% to $2.03. Veeva’s earnings estimate revision picture has also trended almost completely upward since its latest earnings release, especially for fiscal 2020 and 2021, to help it earn a Zacks Rank #2 (Buy) at the moment. And VEEV sports an “A” grade for Growth in our Style Scores system.

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Avis Budget Group, Inc. (CAR) : Free Stock Analysis Report
 
Veeva Systems Inc. (VEEV) : Free Stock Analysis Report
 
ServiceNow, Inc. (NOW) : Free Stock Analysis Report
 
Kohl's Corporation (KSS) : Free Stock Analysis Report
 
Dropbox, Inc. (DBX) : Free Stock Analysis Report
 
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