Monday, KeyBanc Capital upgraded Zep, Inc. (ZEP) shares to Hold from Underweight. The brokerage lowered its 2009 EPS estimate to $0.40 from $0.50.
Given Zep's stock is down 54% year-to-date vs. the S&P 500 (down 18%), analyst Michael Sison upgraded ZEP to Hold as his 12-month downside price target has been achieved. At current levels, ZEP is trading at a fiscal 2010 EV/EBITDA multiple of 6.4x, toward the low end of our 12-month forecasted range, and the analyst does not see a visible catalyst to drive further downside or upside near term.
Given ZEP's second quarter of fiscal 2009 likely encompassed the two most difficult months for the industrial world, the analyst estimates a loss of $0.05 vs. a gain of $0.11 last year. The major culprit for the decline is a 14% fall in volumes as industrial manufacturers idle facilities, weak sales results from the retail sector and very weak demand in transportation markets.
The analyst lowered his fiscal 2009 EPS outlook by $0.10 to $0.40, vs. $1.07 last year, assuming a weaker second half of 2009 than initially expected. The analyst's volume outlook is reduced to an 11% decline year-over-year during second half of 2009 vs. the high single-digit declines previously expected.
On the positive, the analyst sees $1 million-$2 million in cost savings positively impacting fiscal 2009. In addition, positive pricing should boost profitability by $3 million as falling raw materials flow through during second half of 2009. Industry leader Ecolab (ECL) suggested it plans to keep its pricing discipline rational and does not envision price declines.
The analyst sees EPS for fiscal 2010 around $0.70, with three-fourths of the improvement year-over-year coming from a rebound in sales growth primarily during second half of 2010, and the remaining from productivity initiatives.
Currently, ZEP is down $0.40 or 5.06% and trading at $7.51.
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