We expect Seagate Technology Plc STX to beat expectations when it reports first-quarter 2017 results on Oct 19.
Why a Likely Positive Surprise?
Our proven model shows that Seagate is likely to beat earnings because it has the right combination of two key ingredients.
Zacks ESP: Seagate’s Earnings ESP stands at +5.81%. This is because the company’s Most Accurate estimate is 91 cents while the Zacks Consensus Estimate is pegged lower at 86 cents. A favorable ESP serves as a meaningful and leading indicator of a likely positive surprise.
Zacks Rank: Seagate currently sports a Zacks Rank #1 (Strong Buy). Note that stocks with a Zacks Rank #1, #2 (Buy) or #3 (Hold) have a significantly higher chance of beating earnings estimates. Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.
The combination of Seagate’s Zacks Rank #1 and +5.81% ESP makes us reasonably optimistic of an earnings beat. You can see the complete list of today’s Zacks #1 Rank stocks here.
What is Driving the Better-than-Expected Earnings?
Seagate recently announced preliminary results for the first quarter. The company now estimates revenues to be $2.8 billion compared with $2.7 billion guided previously. Moreover, non-GAAP gross margin is anticipated to be 29% compared with its earlier forecast of 27%.
Seagate cited strong demand for its high capacity enterprise HDD product portfolio behind this guidance raise. The company now expects HDD shipments of approximately 67 exabytes and unit shipments to be roughly 39 million, which translates to total average capacity per drive of 1.7 terabytes for the quarter.
However, rising operating expenses driven by a higher variable compensation is a concern. (Read More: Seagate Technology Down on Bleak Preliminary Q1 Results)
Lower PC Shipments to Hurt Results?
We believe that continuous decline in PC shipments is likely to hurt the company’s results. Notably, HDDs are still extensively used in PCs and Seagate derives the bulk of its revenues from these devices.
In fact, according to Gartner’s latest report, PC shipments (including premium ultra-mobiles) in third-quarter 2016 slumped 5.7% year over year to 68.9 million units. Gartner cited the weak back-to-school demand and ongoing low demand in the consumer market, especially in emerging markets, as the main reason for decline in PC shipments.
However, we note that the downtrend has rather moderated in the third quarter, compared with the previous quarters, which is encouraging for Seagate. (Read More: PC Shipments Fall for 8th Consecutive Quarter: Gartner & IDC).
Stocks to Consider
Here are some companies you may consider as our proven model shows they too have the right combination of elements to post an earnings beat this quarter:
Asure Software ASUR has an Earnings ESP of +14.29%. It sports a Zacks Rank #1.
NetApp NTAP, also sports Zacks Rank #1 and has an Earnings ESP of +2.63%.
SITO Mobile SITO, with an Earnings ESP of +100%, flaunts a Zacks Rank #1.
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