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Will Yahoo! (YHOO) Beat Estimates this Earnings Season?

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Yahoo! Inc. , the troubled Internet company, is expected to beat expectations when it reports fourth quarter fiscal 2016 results on Jan 23.

Over the last one year, the stock has outperformed the Zacks Internet Services industry. It has gained 46.04% compared with the industry's gain of 15.36%.

Why a Likely Positive Surprise?

Our proven model shows that Yahoo is likely to beat estimates this quarter. 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. Yahoo has the right combination of two key components.

Zacks ESP: Yahoo currently has an Earnings ESP of +7.14%. This is because the Most Accurate estimate stands at 15 cents, while the Zacks Consensus Estimate is pegged at 14 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Yahoo currently carries a Zacks Rank #3, which when combined with an ESP of +7.14% make us reasonably confident of a positive surprise.

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

Yahoo Inc. Price and EPS Surprise

What is Driving the Better-Than-Expected Results?

Yahoo reported decent third quarter results with earnings exceeding the Zacks Consensus Estimate and revenues missing the same by a slight margin. The results showed signs of a business revamp.

Yahoo is in the process of selling its core assets to Verizon for $4.83 billion. Despite the speculation of a billion dollar discount in the purchase agreement between the parties in the wake of the data breach disclosures, Verizon has not changed any terms of the transaction.

The purchase of Yahoo’s core assets is in line with Verizon’s long-term view to gain traction in the lucrative mobile advertising segment. If the deal materializes, it will improve Yahoo’s cost structure.

Moreover, Yahoo guided well for the fourth quarter. Revenues are expected to be in a range of $1.360-1.400 billion, TAC revenues are likely to be $480 million and revenues on an ex-TAC basis are projected to be $880-920 million. Management expects adjusted EBITDA to be in a range of $260 to $300 million and non-GAAP income from operations to be in a range of $140 to $180 million.

Other Stocks to Consider

You could also consider the following stocks with a positive Earnings ESP and a favorable Zacks Rank:

Corning Incorporated (GLW - Free Report) , with an Earnings ESP of +6.98% and a Zacks Rank #2.

Seagate Technology plc (STX - Free Report) , with an Earnings ESP of +1.87% and Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank  stocks here.

Microsoft Corporation (MSFT - Free Report) , with an Earnings ESP of +1.28% and Zacks Rank #2.

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