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We expect electricity service provider Pinnacle West Capital Corp. (PNW - Analyst Report) to surpass our expectations when it reports third quarter 2013 earnings results before the market opens on Oct 31.

Why a Likely Positive Surprise?

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

Positive Zacks ESP: The Earnings ESP (Expected Surprise Prediction), which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is at +0.46%. This is a meaningful and leading indicator of a likely positive earnings surprise for shares.

Zacks #3 Rank (Hold): The company at present carries a Zacks Rank #3 (Hold). Note that stocks with Zacks Ranks of #1, #2 and #3 have a significantly higher chance of beating earnings. The Sell rated stocks (#4 and #5) should never be considered going into an earnings announcement.  

The combination of Pinnacle West’s Zacks Rank #3 and +0.46% ESP makes us confident of an earnings beat this quarter.

What is Driving the Better-than-Expected Earnings?

The steady improvement in the Arizona market with a concomitant rise in customer base is expected to be the key earnings driver for Pinnacle West. Pinnacle West’s increased transmission investments are also anticipated to fetch good returns.

The company will stand to benefit from a decline in interest expenses owing to its lower debt position, which as of Jun 30, 2013 stood at $2.8 billion compared with $3.2 billion as of Dec 31, 2012.

Pinnacle West during the second quarter projected that its interest expense, net of allowances for borrowed and equity funds used for construction in 2013 will decrease in the range $160-$170 million from $175-$185 million forecast earlier.

Pinnacle West’s flagship AZ Sun program which is progressing well will also propel its growth trajectory. However, weather variations will likely be a deterring factor that might affect earnings.

Other Stocks to Consider

Pinnacle West is not the only firm looking up this earnings season. We also see likely earnings beats coming from these three industry peers:

Alliant Energy Corp. (LNT - Snapshot Report) has an earnings ESP of +4.55% and carries a Zacks Rank #2 (Buy).

Cleco Corp. (CNL - Snapshot Report) has an earnings ESP of +1.91% and carries a Zacks Rank #2 (Buy).

Great Plains Energy Inc. (GXP - Snapshot Report) has an earnings ESP of +3.26% and carries a Zacks Rank #2 (Buy).

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