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Will a Challenging Backdrop Hurt Infosys (INFY) Q1 Earnings?


India-based IT behemoth, Infosys Ltd. INFY, is slated to report first-quarter fiscal 2018 results after the closing bell on Jul 13.

The company has had a mixed earnings history, having met estimates twice, with one beat and one miss over the trailing four quarters. Last quarter, Infosys’ earnings were in line with estimates.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Over the past few months, Infosys has been struggling to adapt itself to the changing political climate in the U.S. To abide by U.S. President Trump’s “Buy American, Hire American” rhetoric, the company announced its plans to hire about 10,000 American workers over the next two years. This is a direct threat to the company’s economical cost structure, which focuses on using its workforce on sites located abroad.

Last month, the company had to pay a $1 million settlement in relation to the violation of U.S. visa requirements for foreign workers. The foreboding sentiment, which was strongly reflected in the annual filing of the company reported last month, is hard to ignore.

In light of these increasing problems, Infosys did not confirm its ambitious $20 billion revenue and 30% operating-margin target (which it had expected to achieve by 2021) in the 2016-17 annual report. We believe that the challenging political climate in the U.S., as well as escalating operating costs will mar the company's fiscal first-quarter financials.

This apart, weakening demand for Infosys’ traditional business, which has continued to put pressure on the top line over the past few quarters, is likely to play a major spoilsport for the soon-to-be-reported quarter. Rapid proliferation of customizable internet-based software has been hampering the company's outsourcing business.

The company had slashed its fiscal 2018 guidance concurrent with its fourth-quarter fiscal 2017 results, signaling tough times. Precipitous decline in client spending is likely to hurt Infosys’ profitability during the fiscal first quarter. Most clients now prefer to seek service delivery through digital technology, adding to its woes. Also, sluggish project ramp-ups in large deals are expected to hurt the fiscal first-quarter top line.

Earnings Whispers

Our proven model does not conclusively show that Infosys will beat the Zacks Consensus Estimate this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, that is not the case as elaborated below.

Zacks ESP: Earnings ESP represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate. Infosys has an ESP of -4.35%, as the Most Accurate estimate is pegged at 22 cents, while the Zacks Consensus Estimate is pegged higher at 23 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Infosys Limited Price and EPS Surprise

Infosys Limited price-eps-surprise | Infosys Limited Quote

Zacks Rank: Infosys has a Zacks Rank #4 (Sell). It should be noted that we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Bruker Corporation BRKR has an Earnings ESP of +30.0% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Broadcom Limited AVGO has an Earnings ESP of +1.71% and a Zacks Rank #1.

Ellie Mae, Inc. ELLI has an Earnings ESP of +2.78% and a Zacks Rank #2.

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