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Pegasystemsis a $5 billion provider of CRM and business process management (BPM) software that enable transaction-intensive organizations to manage a broad array of customer interactions. The company's customers represent a wide range of industries, including banking and financial services, insurance, healthcare management, and telecommunications.
I recently bought this mid-cap Software company, originally founded in 1983, because it's trading at just 5 times sales of $1 billion. And if it achieves 8.4% revenue growth this year to $966 million and 12.5% growth next year to $1.1 billion, it will be maintaining a 10.4% CAGR for sales over seven years.
And after an earnings hiccup last year, estimates are rising again as analysts and the company get in sync on the growth trajectory and needed investments in marketing and sales. More on that challenge coming up.
Plus, the price chart has been basing in a high & tight flag between $62 and $66 since their strong Q4 report on Feb 20 that delivered top and bottom-line beats and raised revenue guidance. And below I share the weekly chart which displays the all-time high close that came after that report and is threatening a bigger break-out to sustained new highs above $66.
First, let's review that earnings performance. PEGA gave investors something they really wanted to see: growth in ACV (average contract value). ACV of $570 million was up 23% year-over-year and term license and cloud ACV grew 40% yoy.
This Q4 report represented a 5th consecutive quarter of strong results, as PEGA capitalizes on digital transformation initiatives in large enterprises and expands its cloud application offerings and capabilities. UnitedHealth, for instance, relies on PEGA to integrate artificial intelligence tools into their services and data analytics.
On the conference call, Pegasystems CFO Ken Stillwell re-framed the company's 2022 targets for 15-17% yoy revenue growth and 23-25% EBITDA margin. As long as the company operates within their "Rule of 40" (margin + growth = 40%+), it prefers to swap margin for a higher growth rate.
Ichor Holdings has slipped to a Zacks Rank #5 (Strong Sell) after it missed earnings back in early February. The stock is right around the same price, but estimates have fallen in a meaningful way. Since that hasn't really impacted the stock, it has moved the valuation metrics.
ICHR's last report had EPS at $0.32 but the Zacks Consensus Estimate was calling for $0.35. That three-cent miss translates into an 8.5% negative earnings surprise. This was the only miss of the last 4 quarters, so it’s not like there has been a very poor earnings history.
Estimate Revisions
The key to the Zacks Rank is the revision to earnings estimates. As the estimates fall, so does the Zacks Rank, and that is just what we have in the case of ICHR.
60 days ago, the Zacks Consensus Estimate for this quarter was $0.42, but that was slashed to the current level of $0.26.
The estimate for the next quarter fell from $0.57 to $0.33 over the same time period.
Full year 2019 estimates slipped from $2.45 to $1.80. The Zacks Rank tends to weight the full year number more than the current quarterly numbers. This is the main reason the Rank fell to the lowest level.
2020 estimates have also dropped, moving from $2.83 to $2.68.
Valuation
Normally I would be excited to see a stock at 12x forward earnings multiple for a tech stock like this would excite me. Problem is, growth is contracting at 22% from last year. The price to book multiple of 2.5x is good for value investors, while a 0.6x price to sales multiple isn't that great for growth investors. Margins have been moving in the wrong direction, and until they turn around, this is a good stock to avoid.
Is Chipotle’s Exponential Stock Growth Sustainable?
Chipotle is a fast-casual restaurant that has outpaced its competitors, driving its growth by adapting to the millennial culture. CMG has seen gains of 63% for 2019 alone, with 52-week growth of 126%. These kinds of gains are unprecedented in this mature space, but Chipotle has been able to find its niche and expand on their competitive advantages.
The cultural shift that millennials have driven into successful business models is what’s galvanizing CMG’s MO. Our society has become exceedingly health conscious, wanting to know where our food is coming from and all the nutritional facts about it. Chipotle has catered to this by “sourcing the very best ingredients we can find and preparing them by hand” with “vegetables grown in healthy soil, and pork from pigs allowed to freely root and roam outdoors or in deeply bedded barns.” Chipotle’s defining competitive edge comes from its ability to provide a healthy well-balanced meal for a reasonable price.
Chipotle is also focusing on its digital presence, to resonate with the ease that millennials are becoming accustomed to. Their app allows users to place an order in the palm of their hand for pick-up or delivery. It lets you skip the lunch-rush line and go directly to the pick-up window for your meal. They also just brought back a digital reward system that should grow Chipotle’s loyal customer base.
Health Concerns
Chipotle’s “healthy” meal proposition was called into question with the E. coli outbreaks that almost destroyed the business. In November of 2015, an E. coli outbreak was spread across 11 states effecting at least 55 people (21 of which were reportedly hospitalized). Chipotle was forced to close all 2000 of its stores to discover the cause of this calamity. CMG dropped about 35% over a 2-month period following the outbreak and continued to trail down till it hit its trough in the beginning of 2018 falling 66% off its 2015 high.
Company Outlook
Still slightly off its 2015 high, Chipotle seemingly has the momentum to bust through its all-time high in the coming months. They have posted enormous gains in the past 3 years for a restaurant in this highly competitive environment. With 2017 and 2018 revenue growth of 14.7% and 8.7% respectively, and comparable store growth of 6.4% and 4% respectively.
Ever since their E. coli outbreak at the end of 2015, they have garnered their food from only the most reliable and health conscious sources. This has taken a toll on their margins for the past 3 years but this supply chain shift has given CMG growing trust and loyalty with its stakeholders. Chipotle has seen economies to scale since 2016 and with an ever-increasing customer base, I see margins only growing further.
Chipotle has been growing its free-cash-flow over the last 3 years to the $334 million they posted at the end of 2018 giving CMG a vast amount of financial flexibility for expansion. The year-over-year EPS growth for 2019 and 2020 are expected to be an astounding 35.21% and 26.75% respectively, according to analysts. These have both been adjusted up recently, with 4 earnings beats over the last 4 quarters I can see these upward adjustments continuing.
The only thing that is holding me back from jumping into this fast-growing stock right now is its high valuation of 55x forward earnings and an over 3x forward earning-to-growth rate. These are both significantly above the industry average. I would like to see a cheaper valuation before I consider buying. I would look to buy at a price below $600 if fundamentals don’t change – Zacks Rank #4 (Buy).
Potential Competitive Buys
Starbucks is a comparable company in the retail-restaurant space that has seen 15% growth in its stock price year-to-date and is trading at much more competitive multiples. Grant it they are only expecting 12.4% and 11.61% EPS growth in 2019 and 2020 respectively, compared to the excessive growth CMG is expecting it doesn’t look like much, but SBUX numbers are still solid for this industry – Zacks Rank #4 (Buy).
Bloomin’ Brands is a comparable value opportunity for the retail-restaurant industry. Bloomin’ owns household name franchises like Outback Steakhouse, Carrabba's Italian Grill, Bonefish Grill, Fleming's Prime Steakhouse and Wine Bar and Roy's. BLMN is trading at 13x forward earnings compared to the restaurant industry average of 22x forward earnings. This value investment comes very cheap considering there consistent/growing bottom line since its IPO in 2012 – Zacks Rank #2 (Buy).
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Pegasystems, Ichor, Chipotle, Starbucks and Bloomin' Brands highlighted as Zacks Bull and Bear of the Day
For Immediate Release
Chicago, IL – April 2, 2019 – Zacks Equity Research Pegasystems (PEGA - Free Report) as the Bull of the Day, Ichor Holdings (ICHR - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Chipotle (CMG - Free Report) , Starbucks (SBUX - Free Report) and Bloomin’ Brands (BLMN - Free Report) .
Here is a synopsis of all five stocks:
Bull of the Day:
Pegasystemsis a $5 billion provider of CRM and business process management (BPM) software that enable transaction-intensive organizations to manage a broad array of customer interactions. The company's customers represent a wide range of industries, including banking and financial services, insurance, healthcare management, and telecommunications.
I recently bought this mid-cap Software company, originally founded in 1983, because it's trading at just 5 times sales of $1 billion. And if it achieves 8.4% revenue growth this year to $966 million and 12.5% growth next year to $1.1 billion, it will be maintaining a 10.4% CAGR for sales over seven years.
And after an earnings hiccup last year, estimates are rising again as analysts and the company get in sync on the growth trajectory and needed investments in marketing and sales. More on that challenge coming up.
Plus, the price chart has been basing in a high & tight flag between $62 and $66 since their strong Q4 report on Feb 20 that delivered top and bottom-line beats and raised revenue guidance. And below I share the weekly chart which displays the all-time high close that came after that report and is threatening a bigger break-out to sustained new highs above $66.
First, let's review that earnings performance. PEGA gave investors something they really wanted to see: growth in ACV (average contract value). ACV of $570 million was up 23% year-over-year and term license and cloud ACV grew 40% yoy.
This Q4 report represented a 5th consecutive quarter of strong results, as PEGA capitalizes on digital transformation initiatives in large enterprises and expands its cloud application offerings and capabilities. UnitedHealth, for instance, relies on PEGA to integrate artificial intelligence tools into their services and data analytics.
On the conference call, Pegasystems CFO Ken Stillwell re-framed the company's 2022 targets for 15-17% yoy revenue growth and 23-25% EBITDA margin. As long as the company operates within their "Rule of 40" (margin + growth = 40%+), it prefers to swap margin for a higher growth rate.
Bear of the Day:
Ichor Holdings has slipped to a Zacks Rank #5 (Strong Sell) after it missed earnings back in early February. The stock is right around the same price, but estimates have fallen in a meaningful way. Since that hasn't really impacted the stock, it has moved the valuation metrics.
ICHR's last report had EPS at $0.32 but the Zacks Consensus Estimate was calling for $0.35. That three-cent miss translates into an 8.5% negative earnings surprise. This was the only miss of the last 4 quarters, so it’s not like there has been a very poor earnings history.
Estimate Revisions
The key to the Zacks Rank is the revision to earnings estimates. As the estimates fall, so does the Zacks Rank, and that is just what we have in the case of ICHR.
60 days ago, the Zacks Consensus Estimate for this quarter was $0.42, but that was slashed to the current level of $0.26.
The estimate for the next quarter fell from $0.57 to $0.33 over the same time period.
Full year 2019 estimates slipped from $2.45 to $1.80. The Zacks Rank tends to weight the full year number more than the current quarterly numbers. This is the main reason the Rank fell to the lowest level.
2020 estimates have also dropped, moving from $2.83 to $2.68.
Valuation
Normally I would be excited to see a stock at 12x forward earnings multiple for a tech stock like this would excite me. Problem is, growth is contracting at 22% from last year. The price to book multiple of 2.5x is good for value investors, while a 0.6x price to sales multiple isn't that great for growth investors. Margins have been moving in the wrong direction, and until they turn around, this is a good stock to avoid.
Is Chipotle’s Exponential Stock Growth Sustainable?
Chipotle is a fast-casual restaurant that has outpaced its competitors, driving its growth by adapting to the millennial culture. CMG has seen gains of 63% for 2019 alone, with 52-week growth of 126%. These kinds of gains are unprecedented in this mature space, but Chipotle has been able to find its niche and expand on their competitive advantages.
The cultural shift that millennials have driven into successful business models is what’s galvanizing CMG’s MO. Our society has become exceedingly health conscious, wanting to know where our food is coming from and all the nutritional facts about it. Chipotle has catered to this by “sourcing the very best ingredients we can find and preparing them by hand” with “vegetables grown in healthy soil, and pork from pigs allowed to freely root and roam outdoors or in deeply bedded barns.” Chipotle’s defining competitive edge comes from its ability to provide a healthy well-balanced meal for a reasonable price.
Chipotle is also focusing on its digital presence, to resonate with the ease that millennials are becoming accustomed to. Their app allows users to place an order in the palm of their hand for pick-up or delivery. It lets you skip the lunch-rush line and go directly to the pick-up window for your meal. They also just brought back a digital reward system that should grow Chipotle’s loyal customer base.
Health Concerns
Chipotle’s “healthy” meal proposition was called into question with the E. coli outbreaks that almost destroyed the business. In November of 2015, an E. coli outbreak was spread across 11 states effecting at least 55 people (21 of which were reportedly hospitalized). Chipotle was forced to close all 2000 of its stores to discover the cause of this calamity. CMG dropped about 35% over a 2-month period following the outbreak and continued to trail down till it hit its trough in the beginning of 2018 falling 66% off its 2015 high.
Company Outlook
Still slightly off its 2015 high, Chipotle seemingly has the momentum to bust through its all-time high in the coming months. They have posted enormous gains in the past 3 years for a restaurant in this highly competitive environment. With 2017 and 2018 revenue growth of 14.7% and 8.7% respectively, and comparable store growth of 6.4% and 4% respectively.
Ever since their E. coli outbreak at the end of 2015, they have garnered their food from only the most reliable and health conscious sources. This has taken a toll on their margins for the past 3 years but this supply chain shift has given CMG growing trust and loyalty with its stakeholders. Chipotle has seen economies to scale since 2016 and with an ever-increasing customer base, I see margins only growing further.
Chipotle has been growing its free-cash-flow over the last 3 years to the $334 million they posted at the end of 2018 giving CMG a vast amount of financial flexibility for expansion. The year-over-year EPS growth for 2019 and 2020 are expected to be an astounding 35.21% and 26.75% respectively, according to analysts. These have both been adjusted up recently, with 4 earnings beats over the last 4 quarters I can see these upward adjustments continuing.
The only thing that is holding me back from jumping into this fast-growing stock right now is its high valuation of 55x forward earnings and an over 3x forward earning-to-growth rate. These are both significantly above the industry average. I would like to see a cheaper valuation before I consider buying. I would look to buy at a price below $600 if fundamentals don’t change – Zacks Rank #4 (Buy).
Potential Competitive Buys
Starbucks is a comparable company in the retail-restaurant space that has seen 15% growth in its stock price year-to-date and is trading at much more competitive multiples. Grant it they are only expecting 12.4% and 11.61% EPS growth in 2019 and 2020 respectively, compared to the excessive growth CMG is expecting it doesn’t look like much, but SBUX numbers are still solid for this industry – Zacks Rank #4 (Buy).
Bloomin’ Brands is a comparable value opportunity for the retail-restaurant industry. Bloomin’ owns household name franchises like Outback Steakhouse, Carrabba's Italian Grill, Bonefish Grill, Fleming's Prime Steakhouse and Wine Bar and Roy's. BLMN is trading at 13x forward earnings compared to the restaurant industry average of 22x forward earnings. This value investment comes very cheap considering there consistent/growing bottom line since its IPO in 2012 – Zacks Rank #2 (Buy).
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Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.