Contents. Overview 3. Zion Bancorp (ZION) 4. Generac Holdings (GNRC) 6. MarketAxess Holdings (MKTX) 8

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2 Contents Overview 3 Zion Bancorp (ZION) 4 Generac Holdings (GNRC) 6 MarketAxess Holdings (MKTX) 8 2

3 Overview Thank you for your interest in Zacks Investment Research and our Top 3 Stock Picks for 2017 report. Each of the 3 stocks in this report were picked based on criteria like strong projected gains over the coming year, high Zacks Rank standing that correlates with getting off to an early start, and individual unique qualities that make it a potential home run for your portfolio. The companies Zion Bancorp, Generac Holdings, and Market Axess Holdings are from different sectors including solar energy, consumer, and defense, which offers diversity to investors who want to invest in all three. In addition to giving you the Big Picture for each stock, this report summarizes the key financial stats and growth indicators that merit your immediate consideration. Read on to get a sense for why we are recommending these remarkable companies. 3

4 Zions Bancorp (ZION) 2017 will be an inflection point for regional banks. Over the past several years, these banks have been shackled by persistently low interest rates due to the financial crisis of These relatively smaller banks have had to be creative to stay afloat during these lean years. But this will change in the new year, as the Fed raised rates in December and is expected to raise rates several times over the next two years. Our top pick for 2017 is Zions Bancorporation (ZION), which operates in several western states: Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah, Washington and Wyoming. The company was founded in 1873 in Salt Lake City, Utah and has about 460 branches that employ more than 10,000 people. Currently, Zions Bancorp has eight subsidiaries: Amegy Bank of Texas, California Bank & Trust, The Commerce Bank of Oregon, The Commerce Bank of Washington, National Bank of Arizona, Nevada State Bank, Vectra Bank Colorado and Zions Bank (Utah and Idaho). The major source of income for banks is net interest margins, but that area has been stagnant for several years. Over the past 12 quarters except for one outlier quarter, Zions Bancorp has seen their net interest margins bounce in an extremely tight range between 3.7 and 3.3. With the Fed raising rates in December and the expectation of at least two more rate hikes in 2017 and another two in 2018, the net interest margins are expected to improve drastically over this timeframe. In the most recently reported quarter, Zions beat the Zacks Consensus Estimate 4

5 for both earnings and revenue for the second consecutive quarter. On a year over year basis, the company saw gains in Interest fees on loans +4%, Net interest income +10%, Wealth management income +33%, Total noninterest income +15%, Customer related fees +11% and Total deposits +4%. Zions has material energy sector exposure that has declined over the past year, but oil and gas related loans still account for 5% of the total loan portfolio. In the most recent quarter, management had decreased loans by $256 million or 10%. As of late, oil and gas prices have begun to stabilize, which in turn will cause this segment to become a neutral to positive element in the long run. There could be a small drag in results due to this exposure in the first two quarters of 2017, but should be a net positive by year's end. Zions Bancorp is in excellent financial health with more cash on hand than long-term debt. At the end of the September quarter, the company had $3.8 billion in cash on its balance sheet and long-term debt of $570 million. The bank generates more cash than its immediate needs, which they return to their shareholders through a strong dividend and stock repurchase program. ZION s preferred dividends are expected to be $10.4 million in Q1 17 and $12.4 million in Q2 17. In July of 2016 the Board of Directors approved a $180 million stock repurchase program and, as of September 30, $135 million remained with the entirety to be spent before July of

6 Generac Holdings (GNRC) Generac Holdings (GNRC) - the Waukesha, Wisconsin-based $2.7 billion market cap leader in the North American residential standby generator market with a 75% market share - found a spot in the Top 3 stock picks for 2017 on the back of its attractive long-term growth drivers. International markets offer the company attractive long-term growth opportunities, but the largely North American nature of its current revenue stream (roughly 80% of current sales are North American) offers plenty of protection from the ongoing unfavorable movement in the U.S. dollar s value. Given the low current penetration level of standby generators in the residential market (estimated to be less than 4%), particularly given the high cost of power outages, the long-term opportunity in this area is very compelling. The estimated market opportunity for Generac as a result of a 1% increase in penetration rate is about $2 billion, which means a steady growth trajectory for the company for many years to come. While growth in the residential market tends to be lumpy from quarter to quarter, the commercial and industrial (C&I) market is a lot more smooth and stable. The company has been steadily gaining share in the C&I market, particularly the light commercial/retail space, with the help of its well reputed natural gas powered small and medium-sized generator units. A combination of organic growth and M&A activity has been driving the company s C&I foray. The company divides its operations into three segments: Residential, C&I, and Other. Roughly 51% of its total revenues come from the Residential segment. About 40% of total sales come from the C&I segment, in which it supplies standby generators to data centers, hospitals, schools, mobile and prime emergency generators, grocery stores, gas stations, retirement homes, police and 6

7 fire stations, and restaurants. Generac is also the top supplier of backup power generation to all major wireless carriers. The Other segment (about 8% of total sales) primarily covers recreational vehicles and air-cooled engines. Generac reports 2016 Q4 results on February 21st, with the current Zacks Consensus EPS for the quarter of $1.03 on $417.1 million in revenues, representing year-over-year growth rates of +6.2% and +16.6%, respectively. Estimates have been steadily going up lately, with the current $1.03 estimate up from 95 cents two months ago. The company beat EPS and revenue estimates in Q3 and raised guidance, the 5th straight quarter of top- and bottom-line surprises. Gross margins were up 60 basis points from the year-earlier level, reflecting favorable product mix and lower commodity costs. The company generated $48 million in operating cash flows and spent $6 million in capex. At the end of the quarter, the company had cash on hand of $54 million and long-term debt of about $1 billion (debt-to-total capital of 72.4%). Generac s debt load is relatively on the higher side, but it isn t a big concern given the maturity schedule and strong cash flows. The stock did really well last year and isn t cheap on conventional valuation metrics. Relative to forward 12-month Zacks Consensus EPS estimates, Generac shares are currently trading at 13.5X, with a 5-year historical trading range of 15.7X and 8.8X. The stock has always traded at a premium to the peer group, which makes sense given market leading position in a high-margin business. 7

8 MarketAxess Holdings (MKTX) After the global financial crisis, the U.S. government enacted new regulatory requirements for banks and brokers. The new rules caused these companies balance sheets to contract, and pushed them to look for alternative ways to conduct their business. They began to utilize fixed income electronic trading platforms that were more cost-effective while also being accurate and more efficient. As more banks and brokers shift their trading operations to electronic trading platforms for fixed income securities, one platform provider has begun to stand out from their competitors. MarketAxess Holdings (MKTX) operates one of the leading platforms for the electronic trading of corporate bonds and certain other types of fixed-income securities, serving as an electronic platform through which active institutional investor clients can access the liquidity provided by their broker-dealer clients. MarketAxess main multi-dealer trading platform allows institutional investor clients to simultaneously request competitive, executable bids or offers from multiple broker-dealers, and to execute trades with the broker-dealer of their choice. The company offers clients the ability to trade U.S. high-grade corporate bonds, European high-grade corporate bonds, credit default swaps, agencies, high-yield and emerging markets bonds. MarketAxess also provides data and analytical tools that help their clients make trading decisions. They facilitate the trading process by electronically communicating order information between trading counterparties. In 2015, about 20% of U.S. high-grade volume was conducted electronically, but this number expanded in 2016 and is expected to continue growing through We believe that this migration by banks and brokers will flow into MarketAxess realm as they are undoubtedly the market leader in this segment. The growing street adaptation of MarketAxess trading platform can be seen in their monthly volume statistics. Between November 2015 and November 2016, the company saw total trading volumes increase in three of their major subcategories: total monthly trading volume +51.8%, U.S. high-grade volume +39.6%, and other credit volume +82.7%. In addition, management has seen continued strong momentum in both the European fixed income trading and emerging 8

9 market debt trading segments. On the earnings side, the company has posted impressive year over year (YOY) gains in several key categories due to increasing U.S. volumes, gains in total market share and the upturn on the international side of the business. Management saw YOY gains in total revenues +21.7%, pre-tax income +31.1%, net income 36.1%, commission revenues +25%, variable transaction fees +34.8% and total trading volume +34.4% MarketAxess also boasts of an extremely envious balance sheet with $332 million in cash & equivalents. Further, they have $502 million in total assets while only possessing $50 million in total liabilities. As you would expect with a cash rich company, MKTX pays a solid annual dividend of $1.04 with a dividend yield of +0.69%, and has a decent-sized share repurchase program. In October, the board of directors approved another $50 million for the program to be added to the remaining $11 million from the previous repurchase program. 9