Zacks Investment Research

Transcription

Contents
Overview2
Stock Selection Process3
Stock Previews
5
Equity Research Reports17
Frequently Asked Questions62
Other Zacks Resources64
Contact Us68
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Overview
Many investors expect the stock market’s positive momentum from last year to continue into 2014.
Driving this optimistic view is a combination of the improving domestic housing scene, still-low
interest rates, some tell-tale signs of life in Europe, and a less worrisome outlook for China. I don’t
buy into this appealing narrative.
My reading of the economic and corporate fundamentals leaves me with a far more cautious outlook for 2014, with the Fed’s policy changes laying bare the market’s vulnerable spots. It was an
easy ride in 2013 with the Fed-inspired rising tide lifting all stock market boats.
I am not making a recession call, though I don’t expect any material improvement in the economic
and earnings growth backdrop either. The Fed’s Taper announcement was well received, but the
winding down of the bond-purchase program leaves long-term interest rates at risk of getting out
of the central bank’s effective control. What this means is that estimates for GDP and earnings
growth will be coming down without the explicit Fed backstop that investors have become so accustomed to.
We have designed the Top 10 portfolio to not only provide downside protection in an environment
along the lines described above, but also offer plenty of upside potential. As you can see, the
portfolio plays a fair amount of deliberate and calculated offense through exposure in the finance,
consumer discretionary, industrial, and other sectors.
We have our defensive names in pet supplies distributor MWI Vet Supply, proxy processor Broadridge and maintenance products maker WD-40 Company. We have plenty of consumer exposure
through GameStop, Alliance Data and even Nutrisystem. The latter group, along with HewlettPackard, are also turnaround stories. All in all, this year’s list is a U.S.-centric, low-beta, mid-cap
weighted diversified portfolio of stocks that offers upside potential without taking too many risks.
The Zacks Top 10 portfolio has traditionally followed a year-long buy-and-hold strategy that retains
the flexibility to make mid-course corrections in response to unforeseen market conditions. The
idea is that if the macro framework turns out to be different than what we expect or the outlook for
an individual company turns negative, we will stay ready to make changes during the year.
Have a prosperous 2014.
Sheraz Mian
Director of Research,
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Stock Selection Process
With the portfolio designed to follow a buy-and-hold approach, we employed the most powerful long-term stock rating system we know of—Zacks Recommendations. We started with
companies with a Zacks Recommendation of “Outperform”.
Right now, there are hundreds of stocks with an “Outperform” recommendation. So we had our analysts narrow down the list using
the Zacks Method.
Below we outline the rigorous 6-step process for selecting stocks.
Step 1: Zacks Recommendation
Stocks that receive an “Outperform” recommendation are projected to outperform the
market over the next 6+ months. In cases where we think business conditions could
improve during the second-half of the year, we considered stocks that have a current
Zacks Equity Research recommendation of “Hold”. For more information about Zacks
Recommendations, please visit our Zacks Equity Research section.
Step 2: Timeliness (Zacks Rank)
There is no better timeliness indicator than the Zacks Rank. While Zacks #1 (“Strong
Buy”) and #2 (“Buy”) Rank stocks tend to warrant the most attention (and rightfully so),
#3’s (“Hold”) were also considered. As long as they met the rest of our criteria, #3’s
could potentially garner a spot on the coveted Top 10 list. The Zacks Rank takes advantage of changes in earnings estimates to help investors become more profitable over
a 1-3 month time horizon. For more information please refer to the Zacks Rank Guide.
Step 3: Zacks Industry Rank
Even the best company will underperform the market if it’s in an out-of-favor industry.
That is why we focus on stock picks from industries with the highest Zacks Industry
Rank. We also gave consideration to stocks in industries we think would come into favor
should the economy begin to show signs of a recovery.
Step 4: Broker Sentiment
Is the company receiving upgrades or is it being hammered with downgrades? Stocks
that have been upgraded or have stable brokerage analyst ratings have proven to outperform the broader market over the years.
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Stock Selection Process continued ...
Step 5: Valuation
Study after study proves that stocks with low valuations will outperform the market over
the long haul. We employed 2 of the best measures of value to uncover many “diamonds
in the rough;” P/E and P/B.
Step 6: Management Effectiveness
Finally, we considered the fiscal health of the company, with a particular emphasis on
how effectively it is managed. Good management creates value for shareholders by getting the most out of the company’s resources. We sought companies generating a return
on equity (ROE) that was above their industry peers.
The investment committee also took the necessary steps to insure the portfolio of stocks
was a group that would work well together in any type of market environment. The stocks
represent many different attractive industries with what we believe is a great mixture of
market cap, growth and valuation attributes.
Our intent is to buy and hold these 10 stocks for the year. However, last year’s market
turbulence made us realize that buy-and-hold did not mean buy-and-forget. So this year,
if the macro framework turns out to be different from what we expect or the outlook for
an individual company turns negative, we will stay ready to make changes during the
year. At that time we will immediately send out an alert email informing our customers of
the change. No stock will be removed because of price performance. However, you may
want to consider selling any stock that falls more than 20%.
Lastly, a note on capital gains taxation. Selling stocks from the portfolio can result in
short-term gains for tax purposes. Investors with questions about the realization of both
short- and long-term gains are encouraged to contact a tax professional.
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Stock Previews
“From the Zacks Top 10 Stocks website, you will
always have access to the most recent reports.”
Alliance Data Systems (ADS)
During this holiday season, you were probably asked several times if you wanted a retailer’s credit
card that would get you 5%-10% off your initial purchase. Did you ever wonder how a clothing
store, or the Pottery Barn, can offer credit cards? Well, it’s with the help of Alliance Data Systems
(ADS), which is one of the top private label and store credit card providers in the U.S.
This company was incorporated in 1996 through a merger between JC Penney’s transaction services business and The Limited’s credit card and bank operation. The company stayed private for
5 years, and then went public in 2001. Once they went public, ADS began to acquire many companies (30 companies to date), and became the fourth largest private label/store credit card provider
in America. They boast of clients like General Motors, Bank of America, AT&T, J. Crew, Ann Taylor,
Hilton, Victoria’s Secret and the Pottery Barn, to name a few.
Alliance Data has three distinct divisions: Epsilon, LoyaltyOne, and Private Label Services and
Credit. The Epsilon division is the marketing arm of the firm. It delivers data driven marketing services, which include analytics, consulting, strategic services, and data. The LoyaltyOne division is
in charge of the AIR Miles rewards program in Brazil and Canada. The Private Label Services and
Credit division provides processing services, receivables financing and marketing services for the
card portfolio. As for revenues, Epsilon brings in roughly 25% of the total, LoyaltyOne about 15%
and Private label accounts for 60%.
Looking into 2014, we see growth across the board, and an increased presence in international
markets. Firstly, management indicated in their 2014 guidance that “principal loss rates stay near
record lows.” This indicates a steady credit performance, which would support strong earnings
growth. The company has seen a steady growth in new portfolios, and has seen retailers using
the Private Label Services as a loyalty tool more frequently. The company generates strong cash
flows, and the trend should continue in 2014 and beyond. Importantly, we continue to see a very
strong uptick in analyst EPS estimates for 2014.
The company’s ability to leverage its strong North American position into opportunities abroad
(less than 5% of total revenues come from outside North America) represents another attractive
avenue. Alliance Data recently achieved a solid foothold in the EU through the acquisition of Brand
Loyalty (60% stake in the company), a loyalty based supplier in the Netherlands. Moreover, the
acquisition has opened the Russian, Japanese and Italian markets to the company. It is estimated
that the Brand Loyalty purchase will account for an additional $0.25 in EPS for 2014. Finally, management believes that Brazil will continue to be a strong growth story through 2014.
Alliance Data is generally considered a play on the secular growth potential of the private-label
credit card offerings for retailers, but the company also remains very well positioned in the market-
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Stock Previews continued ...
ing space. The company’s access to transactional level consumer data gives it a competitive edge
in providing its clients targeted marketing opportunities. Importantly, the company derives the bulk
of its revenues from transactional services provided under long-term contracts.
The stock isn’t cheap, but this blend of attractive growth opportunities with a lower risk profile
earned it a spot in the Top 10 portfolio.
Zacks Equity Research report on Alliance Data Systems (ADS).
Broadridge Financial Solutions, Inc. (BR)
Each year thousands of companies have mandatory annual meetings, and each shareholder is
supposed to be there. But how many of these meetings have you actually, physically attended?
That’s where a proxy service company comes into play; it makes official votes (e.g. voting for board
members of the company). These proxy materials are required to be delivered to shareholders in
advance of the meetings. This is one of the many sub-industries in the large and often complicated
financial complex, but there is a way to profit from it.
Broadridge Financial Solutions (BR) dominates this sub-industry. In fact, you can view Broadridge’s proxy servicing operations as providing the essential plumbing behind the U.S. corporate
governance system. The provision of this essential function has enabled Broadridge to develop
stable relationships with players across the financial services industry, giving it the opportunity to
capture ‘adjacent’ opportunities. This attractive growth outlook and low-risk business profile got
this underfollowed stock a slot in the Top 10 portfolio.
Broadridge provides proxy and technology solutions to the finance industry in the U.S., Canada,
and the U.K. Broadridge is broken into two segments: the Investor Communication Solutions segment and the Processing Solutions segment. Broadridge is the industry leader in both areas.
The Investor Communication Solutions segment focuses on proxy materials; the processing and
distribution to investors for both equities (every year) and mutual funds (every five years). This also
includes the vote processing. This process is done electronically through their ProxyEdge solution.
The segment also provides many other financial reporting services, including trade confirmations,
marketing communication and corporate record-keeping services, to name a few, and accounts
for approximately 75% of total earnings. Broadridge estimates the total size of the communications
solutions addressable market to be in excess of $10 billion, highlighting the company’s attractive
growth opportunity.
The Processing Solutions segment consists of real-time computerized transaction processing services, including data aggregation, portfolio management, trade confirmations, trade settlements
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and performance reporting among others. This segment accounts for 25% of total earnings. Approximately 74% of the company’s processing revenues come from equities, with fixed income
and outsourcing accounting for 16% and 10% of the total, respectively. The company’s dominant
position in this space notwithstanding, it still has plenty of room for market share gains in each of
those areas.
Broadridge has a fairly impressive track record of positive surprises. They beat EPS in the last
quarter by 95% on a 6% positive revenue surprise. They have come out with positive earnings
and revenues surprises in each of the last three quarters. They are in excellent financial health,
generate a lot of cash and don’t shy away from returning those to shareholders through dividends
and buybacks. They pay a growing dividend currently yielding 2.2%, which has been increasing at
double-digit rates in recent years.
Zacks Equity Research report on Broadridge Financial Solutions, Inc. (BR)
GameStop Corp. (GME)
Whether you’re into Xbox, PlayStation or Wii, all of these consoles have become a common centerpiece to the American home theater. This is an especially exciting time for the industry since two
of these three platforms have come out with new consoles in recent days. One company that is set
up to take advantage of all this is GameStop (GME).
GameStop was founded in 1994 in Grapevine, Texas, and is now the world’s largest video game
retailer. As of Jan 1, 2013, GameStop had 4,425 stores in the U.S., along with 1,425 stores in Europe, 416 in Australia and New Zealand, and 336 in Canada. The company also runs a top notch
web page that enables customers to enjoy online shopping as well as local pick up options (for the
gamer who can’t wait for snail mail service).
In terms of earnings contribution, about 30% of GameStop’s total earnings come from new video
game software, about 4% from new video games hardware, about 44% from pre-owned video
game products and about 22% from other sales (including Game Informer Magazine). Overall,
worldwide video game products generate more than $60 billion in revenues annually, and are
expected to grow in excess of 6% over the next few years. This growth is directly due to the new
consoles being produced by Microsoft and Sony.
Another area that will be a strong growth driver is mobile gaming. In 2012, the US mobile gaming
market produced sales of $2.1 billion, and grew 97% year over year from 2011. The trend continued in 2013 and isn’t expected to slow down any time soon. Mobile games have a much higher
profit margin than the game consoles and PC games. This is an area that is expected to obtain
margins of 18% by 2022, which is extraordinary growth for this small niche of the market.
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Along with mobile gaming, another significant growth area is digital downloading of games. GME
estimates that digital downloads accounted for $20.2 billion in worldwide sales during 2010, and
expects 2014 sales will account for $39.0 billion. Digital downloads include PC games, social and
console games, and handheld games. These downloads are available through their web page
platform, and are instantly available on all gaming systems.
There’s a very profitable pattern that occurs in this industry every few years. In 1995 Sony introduced the PlayStation to the world, and a few months later Nintendo 64 was launched, leading to a
massive spike in game sales and consoles that existed for almost 2 years. In October 2000, Sony
PlayStation 2 was released and then 12 months later Xbox was rolled out. We saw another massive spike in sales and profits for GME from October 2000 through the end of 2002. The process
was repeated again when Xbox 360 was launched in November 2005, followed 12 months later by
Sony’s PlayStation 3. It is more than reasonable to expect this pattern to resume with the recent
product refresh at Xbox and PlayStation. The street is expecting a potential 17% increase in same
store sales for 2014. Specifically, we see strong indicators for a very profitable 2014.
GameStop has a debt-free balance sheet and generates a ton of cash that it doesn’t shy from returning to shareholders through dividends and share buybacks. The company’s current dividend
yields an attractive 2.3% and it recently announced an additional $500 million buy-back program
(they repurchased 1.84 million shares in the third quarter of 2013).
While longer-term structural issues tied to the digital migration of gaming content and the growing
popularity of non-PC and non-console platforms remain, GameStop is well placed to benefit from
the ongoing product refresh cycle.
Zacks Equity Research report on GameStop Corp. (GME)
Hewlett-Packard Company (HPQ)
Ever hear someone say: “I could have done that in my garage. It was so easy!” Well, David and
William did just that back in 1939. They started tinkering with audio oscillators in a Palo Alto garage
and ended up creating the birthplace of Silicon Valley. William Hewlett and David Packard were the
original pioneers of the computer age (the garage is actually a historical landmark in California).
These two continued to tinker in their garage for a few years, but took the company public in 1957.
They introduced the first scientific hand-held calculator to the world in 1972, and subsequently
produced their first computer in 1980. The next major innovation came in 1989, with the advent
of the HP DeskJet, which propelled the company into the inkjet printer market. Then in 2002, the
company purchased Compaq to solidify their PC business. To complement their PC business in
the IT services market, HPQ purchased EDS in 2008 for $13.0 billion.
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Overall, the company has several revenue segments: IT Services, IT Solutions, Servers, Networking, Storage, Software, Personal Computers and Printers. About a fifth of the company’s total
revenue comes from the printing business, while about half of the total comes from the sale of
hardware and services to enterprises (personal computers account for most of the rest).
These are not easy times for old-line technology players like Hewlett-Packard, IBM, Microsoft and
others. Secular trends like the decline of PCs as the sole computing platforms and continued tepid
corporate spending levels on technology have been big headwinds for the group. Hewlett-Packard
exacerbated these macro issues by a succession of uninspiring leadership moves over the last few
years. But we see an investment opportunity in this name, and that’s the reason why the stock is
in the Top 10 portfolio.
The company hired Meg Whitman (former CEO of eBay) in late 2011 to steady the floundering
ship, and she is doing an excellent job. A number of issues remain, but as recent results and
company guidance indicates, we may be nearing a bottoming process for the weak business segments. An unequivocal uptrend in operating results will likely not show up until 2015, but we will
see growing evidence of that turnaround in 2014 that should help drive the stock price momentum
going forward.
Even before we see tangible evidence of the ongoing turnaround, the company will remain a cash
flow story. Hewlett-Packard generated over $9 billion in free cash flows in fiscal 2013 and remains
on track to surpass that level in fiscal 2014. They don’t shy away from sharing excess cash with
shareholders through a growing dividend (currently yielding 2.1%) and share buybacks, materially
lowering downside risks in the stock.
Zacks Equity Research report on Hewlett-Packard Company (HPQ)
Mondelez International (MDLZ)
Who doesn’t like chocolate, gum, candy, cookies, crackers and coffee?
Mondelez International (MDLZ) emerged on the public scene following its spin-off from Kraft Foods
in October 2012. And what a strong footing to start upon; it has 9 brands that produce revenues in
excess of $1 billion each (Oreo, Tang, Cadbury chocolates, Trident gum, Jacobs coffee, Nabisco,
LU biscuits, Milka and Cadbury Dairy Milk). The company is a truly global snacking powerhouse,
holding the number 1 position in biscuits, chocolate, candy and powdered beverages, and the
number 2 position in gum and coffee.
This product portfolio was built upon strategic acquisitions by Kraft over several years. The first
building block was the 2007 purchase of Danone’s global biscuit arm for $7 billion. Then in 2010,
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Kraft purchased Cadbury for $20 billion. This new purchase gave Kraft worldwide exposure in the
confection, prepackaged foods and biscuit categories. Specifically, the Cadbury purchase instantly
gave Kraft 60% of the chocolate market share in India. Moreover, it opened up Latin America,
which is estimated to bring in $1 billion in new revenue alone. Along with the new products, the
acquisitions also increased Kraft’s distribution channels. Now it’s all Mondelez’s to grow.
And grow it will. The majority of growth will be coming from emerging markets, which now account
for 40% of total sales (80% of total sales come from outside of North America). The acquisitions
that were previously mentioned enabled MDLZ to establish strong footholds in both China and
India, where new distribution networks will help facilitate growth in these two large nations.
Specifically, in China, Mondelez’s biscuit segment is the market leader with three times the market
share as the next closest competitor. Overall, MDLZ is the leader in market share worldwide for
biscuits. Oreos are another market leader in China, with $500 million in annual sales. The company has focused on increasing advertising in China to broaden its presence in the country. Recently
they hired Yao Ming to advertise cookies for them, and so far it’s working.
But the company is not all sweets and high calorie items (that we all love). They also produce
healthy options. This is another area where MDLZ is heavily investing for future growth opportunities. Mondelez is also being creative by combining some of its existing products into totally new
products. The most exciting is the new “Chocobakery”, which is combining the sweet chocolate
from Cadbury with the delicious biscuits from Danone. These new snacks are already seen as a
hit in India, China and Latin America.
Since this multinational company is so well diversified in products and selling environments, it
would take a massive global macroeconomic downturn to put any significant dent in its profitability.
While it is exposed to fluctuating commodity prices, Mondelez has been successful in hedging its
raw material costs. On the negative side, the company is exposed to dairy volatility, which is extremely difficult to hedge.
Mondelez is in a strong financial position with positive free cash flows. The company offers a stable
dividend (1.65% dividend yield), and is in the middle of a massive stock repurchase program. The
uncertain emerging markets growth outlook remains a headwind, but the impulsive nature of the
company’s iconic branded products account for its lower beta. Opportunities for efficiency gains
add to the company’s growth prospects. Importantly, the stock compares favorably to its peers on
most conventional valuation metrics, gaining it a slot in the Top 10.
Zacks Equity Research report on Mondelez International (MDLZ)
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Middleby Corporation (MIDD)
Have you ever wondered who makes all those fast food machines that cook the food so quickly?
Well, maybe not, but there is one company that corners the market on those items.
Middleby Corporation (MIDD) is the leading global manufacturer of food and cooking equipment
that is used in commercial and industrial kitchens, industrial processing and residential markets.
Specifically, the company has three major segments: The Commercial Foodservice Equipment
Group (accounting for 61% of year-to-date total revenues), the Food Processing Equipment Group
(22% of YTD revenues) and the Residential Kitchen Equipment Group (17% of YTD sales).
This company was founded in 1888 under the name Middleby Marshall Oven Company, and was
purchased by TMC Industries in 1983. In 1985, TMC changed its name to Middleby Corporation.
By the mid-80s Middleby was considered a leading foodservice company when it introduced the
conveyor oven, which revolutionized the pizza industry. Throughout the 1990s, Middleby continued to acquire multiple companies, and by 2000 was in more than 100 countries. Unfortunately,
this expansion stretched the company too thin and left it unprepared when the downturn came
around in 2000.
The current management team took over in 2001 and began to reposition the company by divesting non-core businesses and focusing instead on building scale in the ‘hot side’ of the food service
equipment industry. Throughout the 2000s, the company acquired Nu-Vu Foodservice Systems,
Houno A/S, Alkar Products, Jade Products, New Star and Turbo Chef. These strategic acquisitions
bolstered the portfolio with baking ovens, packing equipment, combi-ovens, light-duty cooking,
speed cook technology and many more product innovations.
In 2013, the company made two extremely impactful acquisitions. Firstly, it purchased Viking
Range (the leading brand in high-end residential cooking equipment) in the early part of the year,
and then it acquired Celfrost (commercial refrigeration and foodservice products) in October. Both
of these purchases will be significant growth drivers for the company over the next several years.
The Viking Range purchase gives Middleby exposure to the ongoing upcycle in the home construction market. This also enables it to adopt commercial technologies into the residential equipment. Sales since the acquisition were between $230-235 million for 2013 (above the $200 million
Viking made in 2012), and are expected to increase further in 2014. The Celfrost purchase gives
Middleby excellent exposure to the India market, and to their distribution channels. Middleby’s
ability to leverage Celfrost’s strong Indian relationships and distribution infrastructure for its entire
product portfolio offers attractive opportunities going forward.
Middleby’s strong food-service equipment franchise makes it a top-of-the-list supplier for all leading restaurant chains. Demand in the commercial food-service space comes from three sources
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– new restaurants, replacement, and menu changes – with each source accounting for roughly a
third of Middleby’s commercial food service sales. This diversity in revenue streams provides the
company’s top-line with a lot of stability.
Key catalysts for the stock include continued market share gains, bolt-on acquisitions, margin
gains at acquired businesses (particularly Viking) and strong free cash flow generation. The stock
had a good run in 2013 and isn’t cheap, but its strong growth profile warrants premium valuation
and is the reason it found a place in the Top 10 portfolio.
Zacks Equity Research report on Middleby Corporation (MIDD)
MWI Veterinary Supply, Inc. (MWIV)
Americans spend about $55 billion a year on pet care alone, and there are 60,000 veterinarians
who take care of animal health issues. So who supplies these veterinarians with medicine and
other products to keep all these animals healthy? A lot of them come from MWI Veterinary Supply
(MWIV).
MWIV distributes supplies and value added services to the animal health care market in the U.S.
and the U.K. Of the 60,000 independent private practicing vets, MWIV supplies 23,000 of them,
accounting for 38% of all private vets in the country. In the UK, the company controls 31% of all
supplies delivered to private vets. More importantly, in the Production animal health market, MWI
counts 5,000+ vets specializing in beef/daily operations, and supplies feed to 50,000+ dairy farms
and 750,000+ beef farms and feeding stations. Finally, the company boasts of over 40,000 products for the vet supply industry.
This is a massive supply company, but they were born from very modest beginnings. Millard Ickes
was a partner in Kindness Animal Hospital in Nampa, Idaho in 1976. He had the brilliant idea that if
he and others pooled their purchases, they could get volume discounts. At first, Mr. Ickes supplied
neighboring vets with the necessary supplies for their businesses. Within 5 years, Mr. Ickes sold
his supply business to Agri Beef Company. The new company acquired Jones Veterinary Supply
in 1990, which enabled the company to branch out to almost 20 more states. In 2002, Agri Beef
sold their interest in the vet supply business to private equity investors who eventually took the
company public through a 2005 IPO at $17 per share. Since the IPO, MWI has acquired several
smaller companies to complement their core business.
In terms of revenue break-up, the Companion segment (dogs, cats, etc.) accounts for 58% of revenue while the Production segment (dairy cows, and cattle) produced 42% of total revenues. On
average vet clinics spend between $150,000 and $200,000 annually on supplies. Over the past
two years, there has been significant consolidation and several competitors have just gone out of
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business (for various reasons). This has created a strong growth opportunity for the company to
increase market share in both the Companion and the Production segments.
Currently, MWI controls about 20-25% of the market share for the Companion Segment and about
20-25% of the Production segment. Given the growth opportunities going forward, we see MWI
acquiring regional distributors to build market share and increase presence throughout the northeastern U.S. (it has a stronger presence in the western U.S., but remains relatively weak in the
Midwest and the Northeast).
MWI remains well positioned in both end markets that it competes in, having roughly the second
largest market shares in each. Both end markets appear well consolidated, with the top 3 players
accounting for more than two-thirds of the total. Smaller regional players account for the rest in
both end markets, with MWI gaining share in the Companion space while the regional players in
the Production segment appear more entrenched.
MWI’s attractive growth prospects, particularly in the Northeast and Midwest, and relatively lowrisk business model with no reimbursement issues got it a slot on the Top 10 portfolio. The stock
had a good run in 2013, but there is still plenty of upside for this low-beta name going forward.
Zacks Equity Research report on MWI Veterinary Supply, Inc. (MWIV)
NPS Pharmaceuticals, Inc. (NPSP)
There’s not much glitz or glamor when it comes to pharmaceutical companies that deal with rare
diseases…but luckily that’s not a prerequisite for the Zacks Top 10 Portfolio. These companies can
be very profitable and produce sizeable margins…which ARE things we like to see. So that’s why
we have added NPS Pharmaceuticals (NPSP) to the portfolio this year.
NPS Pharmaceuticals is a commercial-stage biotechnology company focused on the development of drugs for rare gastrointestinal and endocrine diseases. The company has two drugs – the
recently approved teduglutide (also known as Gattex in the U.S. and Revestive in Europe), an
ultra-orphan drug for the treatment of adult Short Bowel Syndrome (SBS); and Natpara, a hormone
replacement therapy for the underlying cause of hypoparathyroidism (HPT) from osteoporosis.
Natpara successfully completed Phase III trials and the company recently filed for a BLA (Biologic
License Application) to the FDA. The Natpara approval is expected by the middle of 2014.
Gattex, Natpara and other products in the pipeline provide NPSP with a visible pathway for strong
revenue growth in the coming years, starting in 2014. Total revenue in 2014 is expected to be up
more than 70% to $253 million. This growth momentum continues into the following year, with total
revenues exceeding $400 million the following year and more than $650 million in 2016. Gattex is
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the big driver of this impressive growth, with total Gattex sales expected to jump from about $30
million in 2013 to $120 million in 2014 and almost double that level the following year. An earlier
approval and better than expected reception for Natpara represents further upside to this outlook.
Financially, the company remains in excellent health, with more cash on the balance sheet than
long-term debt. The stock had a good run in 2013 and isn’t cheap on conventional valuation metrics. But we see plenty of upside from this low-beta growth story in 2014 as the story of its strong
pipeline of drugs becomes more widely known.
Zacks Equity Research report on NPS Pharmaceuticals, Inc. (NPSP)
Nutrisystems, Inc. (NTRI)
Americans spent over $65 billion on weight loss programs last year, and it is estimated that almost
110 million people attempt a diet each year. This means that a little over a third of the country’s total
population will attempt or is currently attempting to lose weight. That leaves some great potential
for Nutrisystems (NTRI), which provides weight management products and services.
In addition to providing pre-packaged food, the company also provides weight loss support, including online support. The online support consists of group rooms, bulletin boards, chat rooms,
classes, exercise plans and individualized diet plans. Customers can purchase prepackaged foods
though their web page as well as on QVC and the Nutrisystem Everyday retail line.
This company offers a wide array of products for men, women and seniors who are interested in
nutritionally balanced weight loss programs. Nutrisystem also offers management tips and weight
loss strategies for people with type 2 diabetes, and a SUCCESS program that enables users to
keep weight off through balanced nutrition and low Glycemic plans. Then there is Nutrisystem Select, which offers prepackaged frozen foods, smoothies, nutrition bars, bakery items and breakfast
items, along with monthly food supply packages (which consists of breakfast, lunch and dinner
items for 28 days).
The company has geared up to accept the new dieters this year into several new programs. First is
Myway, which gives the customer web-based personalized recommendations by asking about the
customer’s weight loss goals. The customers’ responses steer them into Nutrisystems’ package
offerings: Core, Basic, or Select.
The second rollout is the subscription based digital product for the do-it-yourself market in late Q1.
Then in the second quarter, the company will begin a new product test in major Target stores. In
the third quarter, the company is rolling out another test program of its mass retail, and will start
to see traction with the overhauling of their e-commerce site. These goals are also coupled with
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senior management’s year-long cost-cutting goal.
Nutrisystems is a turnaround story, with the company trying to stem a multi-year decline in revenues, resulting in increased marketing spend and reduced profitability, which in turn raised questions about sustainability of the dividend. The company’s turnaround plan is comprised of upgrading to its e-commerce platform, reintroduction in the retail space, improved pricing and a better
pipeline of products. Most elements of this plan are already in place and position the company
strongly for the 2014 diet season. Importantly, the company’s dividend (currently yielding 2.1%) is
completely safe.
Zacks Equity Research report on Nutrisystems, Inc. (NTRI)
WD-40 Company (WDFC)
“Take these three items, some WD-40, a vise grip, and a roll of duct tape. Any man worth his salt
can fix almost any problem with this stuff alone.” -- Walt Kowalski (Clint Eastwood, from the movie
Grand Torino).
So ingrained in Americana is WD-40 that the legend himself directed and spoke that classic line. If
it works for just about anything, then why not the Zacks Top 10 portfolio?
WD-40 Company (WDFC) was founded in 1953 and is headquartered in San Diego, California.
Besides owning the most well-known brand of lubricants, WDFC also makes heavy-duty hand
cleaners and household products sold around the world. These products include the heavy-duty
hand cleaners LAVA and Solvol. Household products include 2000 flushes, Carpet Fresh, X-14
and Spot Shot.
The company also has two other lines of revenue: the WD-40 Blue Works line, which is designed
for industrial markets, and WD-40 Specialist, which is directed at the consumer market. The Blue
Works line is set up to facilitate industrial clients with products for maintenance, repair and overhauling applications. The Specialist line is targeted towards the do-it-yourself person and the trade
specialists.
While WD-40 is the household name for lubricants in America, the name is gaining significant traction in both Europe and Asia (both becoming top growth drivers going forward for the company).
Overall, WDFC sells its products in 187 countries worldwide, and recorded sales of $368.5 million
for the fiscal year 2013.
The company beat on both the top- and bottom lines in its last quarterly release and raised guidance. To quote CEO Garry Ridge: “Our business is solid and we see a bright future through a
15
lens of evidence-based optimism. We have built a solid base platform for growth, and our tribe
continues to deliver results.” As a result, two-thirds of all analysts covering the stock raised their
estimates for 2014, resulting in the Zacks Consensus Estimate rising to $2.76 from $2.65 over the
last 60 days.
WD-40 has a debt-free balance sheet and generates plenty of free cash flows. It recently announced a 10% increase in quarterly dividend, currently yielding 1.8%. The stock isn’t cheap on
traditional valuation metrics after its solid run in 2013, but it isn’t nose-bleed expensive either. Importantly, the stable business of this low-beta consumer staples operator not only offers downside
protection, but also offers attractive upside potential in 2014.
Zacks Equity Research report on WD-40 Company (WDFC)
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Frequently Asked Questions
Who Should Follow The Zacks Top 10 Stocks Recommendations?
Zacks Top 10 Stocks is designed for those who want to invest some or all of their money
in a buy-and-hold style that allows them to sleep well at night. More importantly, the recommendations are based upon the time-tested philosophy employed at Zacks that has
resulted in market-beating performances in good years and bad.
Who should NOT follow the Zacks Top 10 Stocks recommendations? Anyone who gets
obsessed with the day to day fluctuations of their stocks. For you, we have excellent
trading services and tools that are more appropriate (Zacks Confidential, Zacks Ultimate, Research Wizard, Breakout Growth Trader, Follow the Money Trader, Home Run
Investor, Income Plus, International Trader, Market Timer, Options Trader, Reitmeister Trading Alert, Turnaround Trader, Zacks Value Investor, Whisper Trader, and Zacks
Method for Trading). Zacks Top 10 Stocks customers want to take a break from the daily
grind of stock investing to use that time for more favored pursuits.
What Is Included with the Subscription?
Each year this service will highlight the 10 best stocks we recommend to buy and hold
for the coming year. While these stocks are first announced to subscribers on January
2, 2014, customers can sign up anytime afterwards and still benefit from the service. No
matter when you sign up, the subscription term will end the day before the next year’s
annual issue is released. For simplicity, it is safe to assume that subscriptions for the
2014 edition of Zacks Top 10 Stocks will end on Jan 1, 2015.
Here are the resources available to subscribers for making the most of these recommendations.
■■ Web Site: Here you will always have access to all of the service’s resources. Located at
www.zacks.com/top10 (Be sure to bookmark it for future reference). Most importantly is the
listing of all the stocks in the service with research and commentary to help you fully investigate these recommendations. Just click on the name of the stock to read the most current
research report created by our team at Zacks Equity Research.
■ ■ Annual Issue: This PDF report is the main element of the service for the coming year. It
will also be available on the website in the Regular Issues section of the home page and
commentary page.
■■ Quarterly Updates: For each of the next three quarters, we will provide an update issue
on the stocks. We will notify customers via email when the quarterly updates are made
available. These PDF reports will also be available on the site in the Regular Issues section
of the home page.
62
Frequently Asked Questions continued ...
■■ Special Alerts: As noted earlier, from time to time we may want to provide subscribers
with additional information. For example, we may change(s) to the portfolio by adding/deleting stocks. Each of these Special Alerts will be e-mailed to subscribers and be made available in the Special Alerts section of the home page.
What Is the Satisfaction Guarantee and Refund Policy?
We believe that the Zacks Top 10 Stocks service gives you a great opportunity to outperform the market in 2014. But what if the stocks do not perform as expected? If the
Zacks Top 10 Stocks stock portfolio does not outpace the S&P 500 in 2014, then you
can apply your full subscription amount to any other Zacks service in the future. See full
Satisfaction Guarantee details.
A customer can get a full refund on the service if they cancel before the Annual Issue is
released. Given the nature of the service, we cannot offer any other form of refund after
the Annual Issue is released. Why is that? Once a customer sees the list of 10 stocks for
the year, then they have unlocked the main element of the service. That is why we offer
the Satisfaction Guarantee noted above which helps customers in the event the service
does not fulfill its mission to the market in 2014.
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At Zacks Investment Research, we value you as a customer and respect your privacy.
Our privacy policy strictly adheres to the following tenets: See our Privacy Policy.
63
Other Zacks Resources
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Zacks.com
This is our free web site that offers the following powerful features.
■■ Zacks Profit from the Pros. Zacks Profit from the Pros. Delivered five times a week – every trading day – this email provides the easiest way for you to get a wealth of independent
research and stock ideas. Plus, you’ll receive our Weekend Wisdom issue each Saturday.
You’ll also receive expert commentary, top stock picks, winning stock screens, and more.
If you received this special report, then you are already set up as a Profit from the Pros
subscriber. Now stay tuned to your inbox to receive these critical updates. See the current
issue.
■■ Portfolio Tracker. Manage your portfolio on Zacks.com, and we’ll send you daily alerts of
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■■ Analyst Blogs. Get the latest news and analysis on key stocks, industries, and the markets
with our Analyst Blogs. See the latest blog.
■■ Industry. See what industries are hot or not. Keep your eye out to know industry developments and how they affect your stocks. Read our Industry Rank articles.
Zacks Premium
Our premier subscription service that provides Zacks proprietary research. It’s the same research
that leading Wall Street brokerage firms pay millions of dollars for each year – but at a low price
just for individual investors.
■■ Zacks Rank. This is the cornerstone and foundation of all of Zacks independent research.
With an uncanny ability to predict stocks likely to beat the market within 90 days, the Zacks
#1 ranked stocks (Strong Buys) boast a 26% average annual return since 1988. Conversely, the Zacks #5 ranked stocks (Strong Sells) have been outpaced by the S&P 500 by 90%
in that same time. Learn more...
■■ Zacks Equity Research and Recommendations. Gain proven long-term recommendations and in-depth research with proven cumulative return of 475% since 2003, handily
beating the market. Learn more...
64
Other Zacks Resources continued ...
■■ Custom Screening and Email Alerts with the Zacks Rank. Use your favorite screens
but add the power of the Zacks Rank. Learn immediately when the Zacks Rank of your
portfolio’s stocks changes so you can take quick action. It’s only available and all included
in Zacks Premium. Learn more...
Zacks Confidential
With his all-new service, Steve Reitmeister takes you “behind the scenes.” Each week, he spotlights one of our experts who is about to trigger the most compelling trades to beat the current
market. He will confide to you that strategist’s best insights, buys and sells — information not available to the public. Learn more...
Zacks Ultimate
Zacks is unlocking the Vault, allowing full access to our most coveted secrets. This opportunity
reveals Zacks’ exclusive stock picks and insights, from trading services that, produce scores of
double-digit winners, even in volatile markets. Learn more...
Research Wizard
This powerful screening and backtesting software puts you in control of your investment strategy.
Use the same tool professional stock pickers use to find winning stocks in any market. Learn
more...
Breakout Growth Trader
What if you could detect little-known small cap stocks that are starting their aggressive growth
moves? Then buy just before Wall Street takes notice, and sell in 1-3 months before earnings
announcements may threaten the gains. That is how our new service targets quick returns of +1525% and more at greatly reduced risk. Learn more...
Follow the Money Trader
Uncovers the stocks bought and sold by the institutions in the mountains of their regulated 13D
and 13G filings. With such large institutional positions, these stocks are likely to soar once the
market catches on. Learn more...
Home Run Investor
Zacks’ long-term investor service targets under-the-radar companies with over-the-top +50%,
+100%, +200% potential. But it’s ever watchful to prevent strike-outs by cutting losers and providing diversity. The key is pinpointing strong Zacks Rank companies with potential to grow past the
normal one-to-three-month profit zone. Learn more...
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Income Plus Investor
Zacks introduces a new approach to income investing. It’s designed to balance more aggressive
moves with a steady flow of income. Selected high dividend stocks plus other low-risk assets replace fixed-income investments that lose to inflation. Learn more...
International Trader
Why restrict your profit search to the U.S., which generates less than 22% of the world’s GDP?
Directed by Chief Equity Strategist John Blank, Ph.D., this service offers extreme upside potential and protection against domestic downturns. It rides tailwinds of stock valuation discounts and
booming economies relative to the U.S. with selected ADRs and ETFs for stocks, bonds, currencies, and more. Learn more...
Market Timer
Small market swings, up or down, can lead to big profits. The new Zacks Market Timer detects
early signals through technical patterns, investor sentiment, global macro trends, and Zacks Rank
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Options Trader
Kevin Matras infuses options trading with the +26% yearly gain power of the Zacks Rank plus his
own market-beating stock screens. This creates the potential for steady and substantial returns using only a fraction of the money you would have risked on regular stock purchases. Learn more...
Reitmeister Trading Alert
The Reitmeister Trading Alert is Zacks’ answer to today’s volatile market. It uses the power of the
Zacks Rank, combined with value trading and a dash of market timing, to generate profits no matter what the market has to offer. Learn more...
Value Investor
This long-term service combines value criteria with Zacks Rank timing. We’ll track undervalued
companies until the market starts to see their real worth. Then we’ll “pounce” for gains that can
build for years. Learn more...
Whisper Trader
Zacks has discovered the Stock-Picker’s Holy Grail. Whisper Trader is the long-sought way to take
the surprise out of earnings reports. Using only the most accurate analyst whispers, this model
targets positive surprises with 77.96% accuracy. Tests show that over the past ten years, through
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two recessions, its signals would have averaged a yearly gain of +62.1%. Learn more...
Zacks Method for Trading
Learn how to use the Zacks Rank even more effectively than professional fund managers, with
simple step-by-step instruction. Learn more...
The return numbers presented assume no transaction costs. Details of how Zacks calculates
performance for the Zacks Rank Portfolios and strategies is available at: http://www.zacks.
com/performance.
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Email: top10@zacks.com.
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Zacks Investment Research

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