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The Zacks Analyst Blog Highlights: Cisco Systems, IBM, Lithia Motors, Constellation Brands and Barrett Business Services

CHICAGO, Aug. 14, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Cisco Systems (Nasdaq:CSCO-Free Report), IBM (NYSE:IBM-Free Report), Lithia Motors Inc. (NYSE:LAD-Free Report), Constellation Brands Inc. (NYSE:STZ-Free Report) and Barrett Business Services Inc. (Nasdaq:BBSI-Free Report).

Zacks Investment Research, Inc., www.zacks.com

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Wednesday's Analyst Blog:

Cisco Beats Again on Top and Bottom Lines

Cisco Systems (Nasdaq:CSCO-Free Report) has reported its fiscal Q4 2014 earnings after the bell Wednesday, with typically positive results: the tech giant posted earnings per share (EPS) of 50 cents per share (actual, GAAP) on total sales in the quarter of $12.36 billion. This topped the Zacks consensus estimates of 48 cents per share on $12.12 billion in revenues, respectively.

It would seem at first blush that Cisco's foray a few years back diving into cloud-based solutions is showing signs of paying off, especially with beating expectations on the revenue side (an earnings beat for Cisco is a no-brainer by this point; the company hasn't posted a negative earnings surprise since 2008). Cisco's products (consisting of mostly routers and switchers, where they are still a first-tier producer) brought in $9.5 billion in the quarter, while services garnered $2.8 billion.

It will likely take the conference call coming a bit later to really dig into the substance of these numbers, especially regarding guidance for fiscal year 2015, but the year-over-year growth is likely a good sign that the move toward the "Intercloud" is now bearing some fruit. Gross margins seem to be a bit under pressure, which has been the case with Cisco -- as well as plenty other big names in tech trying to make the jump into the high-growth end, like IBM (NYSE:IBM-Free Report) -- for a while now.

Cisco also bought back 1.5 billion in CSCO shares for the quarter, another thing investors have come to expect. The company's 4% positive earnings surprise is about exactly the average for the past four quarters, as well. What's nice to see for Cisco that's not so typical is the back-to-back beats on the top line.

Analysts typically have made no adjustments to earnings expectations for Cisco Systems in the quarter; once guidance is established and certain aspects are discussed on the call -- among them enterprise IT spending trends, growth in China and Cisco's 9% revenue exposure in Russia -- investors will have a better idea how to play the Zacks Rank #3 stock going forward. Year to date, Cisco shares are up 12%, but year over year they're down about 4%.

3 Stocks to Brave a Volatile Market

While the naysayers warn of a crash every time the market hiccups, it is evident that we are currently in one of the most powerful and resilient bull markets we've seen in a long time. Five years of cheap money, pumped-up stock prices and gradually rebuilding investor confidence have powered the market to reach some uncharted territories.

But how long can it last? Amid the melee between the bulls and the bears, a layman investor might get lost. Choosing stocks that promise earnings growth may not be enough to ensure returns if the much-dreaded crash finally hits. And even if one manages to find some stocks that have enough potential to hold ground, investing in most them might not be that lucrative as most of them no longer hold reasonable valuations.

Let's find some stocks using traditional indicators of stability and growth.

What Drives the Bottom Line?

Sales drive earnings, earnings drive the stock price. This time-honored adage still holds true as an investment idea reviewed in bare essentials.

Since the most recent recession hit six years ago, many companies have slashed costs and restructured operations to become leaner and more efficient. This has translated into improved profit margins, leading to earnings growth despite sedated sales growth.

But earnings advancements based on margin expansion can outpace sales growth for only so long. Over the long term, earnings growth typically trails along the lines of revenue growth.

Companies have been aggressively chasing growth in recent times, as evidenced by the spurt in mergers and acquisitions. Granted, the companies had huge amounts of cash reserves, and the credit markets were practically encouraging them to lever up. But the primary reason remained the relentless pursuit of top-line growth that has become harder and harder to come across in these tricky economic conditions.

Such behavior by the companies only serves to underline the importance of robust revenue growth as a key metric to select stocks.

What Drives Revenues?

Consumer spending is a direct determinant of business sales. With the GDP growing at an impressive rate of 4% in the second quarter, the economy seems to be gaining momentum after shrinking 2.1% in the previous quarter. The unemployment rate is steadily declining. And as hiring picks up, consumer demand will follow suit. Acceleration in wage growth could also boost consumer spending.

In fact, the country trade deficit for June shrank 7%, which could imply a modest upward revision to the already strong second-quarter GDP estimates. Most importantly, it prompts gutsy third-quarter GDP expectations.

As U.S. consumer spending accounts for over two-thirds of the economic output, GDP expansion augurs well for organic growth of the business community.

The Power of Industry Rank

Research indicates that about half the price performance of a stock can be attributed to the industry group that it belongs to. Using a sorting metric called Zacks Industry Rank, one can screen for stocks that belong to the top-performing industries. A top Zacks Industry Rank signifies that more stocks within that group are likely to have upward earnings estimate revisions, implying bullish outlook for the industry.

Historically too, we have found that the top 50% of Zacks-Ranked Industries outperform the bottom 50% by a factor of more than 2 to 1. So it's a good idea to leverage the Zacks Industry Rank to shortlist stocks.

Growth & Valuation Metrics

Apart from a strong track record of sales growth and a robust industry rank, one should look for companies with strong long–term growth expectations. This should help select companies with strong earnings potential driven by revenue growth.

We have shortlisted three stocks based on the above metrics and incorporating valuation multiples. All these stocks are trading at a discount to their respective peer group average forward P/E and P/S ratios.

Lithia Motors Inc. (NYSE:LAD-Free Report)

Lithia Motors is a leading automobile retailer and automotive franchisee in the U.S., serving both urban and rural markets. With the auto market continuing to enjoy robust momentum, Lithia Motors is displaying healthy growth across its segments.

The auto dealer has been on an acquisition spree lately, acquiring/opening eight stores so far this year. The acquisitions of Vic Alfonso Cadillac, Braley & Graham Buick GMC and Access Ford Lincoln are expected to add $165 million annually to its revenues. The company is also set to acquire DCH Auto Group Inc., which will augment revenues by $2.3 billion approximately per annum.

The Retail/Wholesale Auto/Truck industry currently holds a Zacks Industry Rank of 34 out of 265 industries, placing it in the top 15% bracket.

Sales Growth in Previous Year = 20.8%

Long-Term Growth Consensus Estimate = 25%

P/E Ratio: 18.1; Peer Group P/E Ratio: 24.2

P/S Ratio: 0.5; Peer Group P/S Ratio: 1.0

Zacks Rank #1 (Strong Buy)

Constellation Brands Inc. (NYSE:STZ-Free Report)

Constellation Brands is a leading international producer and marketer of beverage alcohol brands, boasting a formidable portfolio of popular labels across the wine, spirits and imported beer categories. The company is the largest multi-category alcohol supplier in the U.S. and the largest wine company in the world.

The company's top-line has benefited from the consolidation of the Crown Import business as well as robust demand for beer. Last year, the company acquired Grupo Modelo's U.S. beer business for a sum of $4.75 billion, boosting its sales by $2 billion in fiscal 2014.

Constellation's beer segment now represents about half of its total sales; and it grew a strong 10% last year, on the back of new product offerings, new points of distribution and effective marketing and advertising strategies.

The Alcoholic Beverages industry currently holds a Zacks Industry Rank of 34 out of 265 industries, placing it in the top 13% bracket.

Sales Growth in Previous Year = 72.6%

Long-Term Growth Consensus Estimate = 17.3%

P/E Ratio: 19.9; Peer Group P/E Ratio: 20.3

P/S Ratio: 3.0; Peer Group P/S Ratio: 13.7

Zacks Rank #2 (Buy)

Barrett Business Services Inc. (Nasdaq:BBSI-Free Report)

Barrett Business Services, an outsourcing firm, provides business management solutions, combining human resource outsourcing and professional management consulting. With the company's brand gaining more recognition, its client penetration is reaching deeper, ranging from industries such as telecommunications and transportation & shipping to manufacturing and food processing.

The company's commendable sales growth in recent times was attributable to organic growth arising from existing client base as well as strong referral channels. Also, the company's client retention rate of over 90% indicates sustained revenue growth acceleration, going forward.

The outsourcing industry currently holds a Zacks Industry Rank of 96 out of 265 industries, placing it in the top 36% bracket.

Sales Growth in Previous Year = 32.3%

Long-Term Growth Consensus Estimate = 22.5%

P/E Ratio: 18.8; Peer Group P/E Ratio: 20.1

P/S Ratio: 0.7; Peer Group P/S Ratio: 2.8

Zacks Rank #1

Bottom Line

The crux remains that the top-line drives the bottom-line. A trend of bottom-line growth consistently outpacing top-line growth in most quarters has been a matter of concern throughout the recovery. Companies have jacked up earnings for years by slashing costs. However, going forward, it is clear that only companies with strong revenue growth prospects can retain their earnings momentum and augment shareholder wealth.

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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 http://www.zacks.com/performance for information about the performance numbers displayed in this press release.

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