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We expect personalized products and service provider, Shutterfly, Inc. (SFLY - Analyst Report), to beat expectations when it reports fourth quarter and full year 2013 results on Feb 5, 2014. Last quarter, it posted a positive earnings surprise of 61.29%. Let’s see how things are shaping up for this announcement.

Why a Likely Positive Surprise?

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

Positive Zacks ESP: Expected Surprise Prediction or Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +5.51%. This is meaningful and a leading indicator of a likely positive earnings surprise for shares.

Zacks Rank: Shutterfly carries a Zacks Rank #1 (Strong Buy). Note that stocks with Zacks Ranks #1, 2 or 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 Shutterfly’s Zacks Rank #1 (Strong Buy) and +5.51% ESP makes us confident about a positive earnings beat.

What is Driving the Better-Than-Expected Earnings?

Shutterfly’s fourth quarter is seasonally the strongest quarter of the year. The company generates majority of its revenue during this quarter, which is also the holiday season. Therefore, we expect the top and bottom lines to improve during the quarter. In fact, despite posting a loss, the company widened its earnings guidance during the third quarter. However, the loss incurred was lower than management’s expectation due to an improved top line. Also, total orders generated went up 8% year over year.

Going forward, management foresees several opportunities ahead as the social expression and personal publishing markets are still in a nascent stage. Moreover, its strategic partnerships with retailers and efforts to develop a successful commercial printing business bode well for the company’s growth.

Shutterfly has witnessed upward movement in estimates in the past 30 days for the fourth quarter as well as for full year 2013.

Other Stocks to Consider

Other stocks in the sector that have both a positive earnings ESP and a favorable Zacks Rank are:

Zillow, Inc. (Z - Snapshot Report), with Earnings ESP of + 20.0% and a Zacks Rank #1.

Youku Tudou Inc. (YOKU - Snapshot Report), with Earnings ESP of + 20.0% and a Zacks Rank #2 (Buy).

WebMD Health Corp. (WBMD - Snapshot Report), with Earnings ESP of + 5.56% and a Zacks Rank #3 (Hold).


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