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Can Red Hat (RHT) Maintain its Earnings Streak in Q1?

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Red Hat Inc.  is set to report first-quarter fiscal 2017 results on Jun 22. In the last quarter, the company delivered a positive earnings surprise of 9.68%. On an average, Red Hat has delivered a positive earnings surprise of 11.27% over the past four quarters.

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

Factors to Consider

Red Hat has been gaining market share and its Linux servers are well positioned to drive top line growth. We believe that the company also has significant growth potential in the public cloud segment over the long term. In addition, the increasing demand for its offerings like OpenShift and OpenStack is a positive.

Additionally, Red Hat’s strong product pipeline, continuing investments to expand product portfolio and key partnerships with the likes of IBM Corp. (IBM - Free Report) , Dell and Intel (INTC - Free Report) will drive overall growth.

However, sluggish IT spending and intensifying competition remains headwinds. Also, Red Hat’s strategy of sacrificing service revenues to boost subscription revenues over the long run is expected to hurt top-line growth over the next few quarters.

For the first quarter, the company guided revenues in the range of $558 million-$566 million while it expects non-GAAP earnings per share to be approximately 50 cents.

Earnings Whispers

Our proven model does not conclusively show that Red Hat is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. This is not the case here as you will see.

Zacks ESP: Red Hat currently has an Earnings ESP of 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 33 cents.

Zacks Rank: Red Hat has a Zacks Rank #3 (Hold), which increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

RED HAT INC Price and EPS Surprise

RED HAT INC Price and EPS Surprise | RED HAT INC Quote

Stock to Consider

The following stock can be considered at the moment as our model shows that it has the right combination of elements to post an earnings beat in its upcoming release:

Reliance Steel & Aluminum Co. (RS - Free Report) has an Earnings ESP of +4.65% and a Zacks Rank #3.

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