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Bear Of The Day: CDK Global (CDK)

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CDK Global (CD) has slipped to a Zacks Rank #5 (Strong Sell) and it is the Bear of the Day today.  Let's take a look at why this stock fell to the lowest Zacks Rank in this Bear of the Day article.

Description

CDK Global, Inc. provides software and technology solutions for automotive retailers in the United States, Europe, Canada, and internationally. The company offers Dealer Management System (DMS), a portfolio of layered software applications and services for automotive retailers, original equipment manufacturers (OEMs), consumers, and It serves approximately 30,000 retail locations and OEMs. CDK Global, Inc. has a partnership with Integrated Rental. The company was founded in 2014 and is headquartered in Hoffman Estates, Illinois.

Earnings History

I see a solid earnings history here with 3 beats in the last 4 quarters.  The lone standout was an earnings  meet.

Over that time horizon the average positive earnings surprise computes to 16%.

Those are good stats, so why is it a Zacks Rank #5 (Strong Sell)?  

The Zacks Rank does take into account the earnings history, but more than that it looks at earnings estimate revisions.

Earnings Estimates

I see a decrease in earnings estimates for this quarter, next quarter, this full year and next year as well.   That is not what investors want to see.

This quarter has seen the Zacks Consensus Estimates fall from $0.79 to $0.65 over the last 30 days.  Over that same time horizon the estimate for next quarter slipped to $0.70 from $0.89.

The full year 2020 estimate fell dramatically from $3.23 to $2.60.  Most investors are looking forward to 2021 and that number has fallen as well.  The 2022 fiscal year has seen estimates fall from $3.41 to $2.78.

Those big negative revisions have all come over the last 30 days and that is what has caused the Zacks Rank to fall.

Valuation

The valuation is a little high given the numbers I see.  The 19x forward estimates is right about the historical multiple for the market, but that comes after the company posted a contraction on the topline.  I see margins moving in the wrong direction... as operating margins have slipped from 19.5% to 18.8% over the last three quarters.

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