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We expect semiconductor company KLA-Tencor Corporation (KLAC - Analyst Report) to beat expectations when it reports third quarter 2013 results on Jul 25.

Why a Likely Positive Surprise?

Our proven model shows that KLA is likely to beat earnings estimates because it has the right combination of two key ingredients.

Positive Zacks ESP: The expected surprise prediction or ESP (Read: Zacks Earnings ESP: A Better Method), which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +2.53%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.

Zacks Rank #2 (Buy): Note that stocks with a Zacks Rank #1, #2 and #3 have a significantly higher chance of beating earnings estimates. The sell-rated stocks (Zacks Rank #4 and #5) should never be considered going into an earnings announcement. 

The combination of KLA’s Zacks Rank #2 (Buy) and an ESP +2.53% makes us reasonably confident in looking for a positive earnings beat on Jul 25.

What is Driving the Better than Expected Earnings?

KLA’s new products, process node transition and strong demand for smartphones and mobile computing devices will likely drive capex spending and growth in the second half of the year.

Also, according to a recent report from Gartner, worldwide wafer fab equipment (WFE) spending will return to growth in 2013 with WFE spending projected to surpass $35.4 billion, a 7.4% increase from $33 billion in 2012. This is a big positive for the company.

The positive trend is seen in the trailing four-quarter average surprise of 9.84%.

Other Stocks to Consider

KLAis not the only firm looking up this earnings season. We also see likely earnings beats coming from these companies:

  • Syntel Inc. (SYNT - Snapshot Report), with an ESP of +0.82% and a Zacks Rank #1 (Strong Buy)
  • InvenSense Inc. (INVN - Snapshot Report), Earnings ESP of +8.33% and a Zacks Rank #2 (Buy)
  • Scientific Games Corp. (SGMS - Analyst Report), with an ESP of +100.0% and a Zacks Rank #3 (Hold)

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