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Zacks Investment Research downgraded Zep, Inc. (ZEP - Snapshot Report) 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 - Snapshot Report), Minerals Technologies Inc. (MTX - Snapshot Report) and NL Industries Inc. (NL). All these stocks sport a Zacks Rank #1 (Strong Buy).

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