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Will DST Systems (DST) Pull Off a Surprise in Q3 Earnings?

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DST Systems Inc. is set to report third-quarter 2016 results on Oct 20, 2016. Last quarter, the company posted a positive earnings surprise of 13.6%. Let us see how things are shaping up for this announcement.

Factors at Play

DST reported better-than-expected second-quarter results, wherein both the top and bottom lines surpassed the Zacks Consensus Estimate. Also, both revenues and earnings increased on a year-over-year basis.

It is worth mentioning that DST has divested its Customer Communications division to focus on financial services and health care segments. During the second quarter, the company successfully sold its North American Customer Communications division to Broadridge Financial Solutions (BR - Free Report) for a cash consideration of $410 million. It also divested its UK Customer Communications Bristol production facilities in exchange for net pretax proceeds of approximately $16 million. The proceeds from the aforementioned divestments will facilitate the acquisition of new businesses. It will enable the company to capitalize on new opportunities in health care and financial services. However, all of this depends on how the company utilizes these funds to drive future growth. Furthermore, loss of revenues due to divestments makes us increasingly cautious about the stock’s future performance.

Nonetheless, we are still of the opinion that DST Systems’ business volume and massive scale of operation in Financial Services will attract new customers. Moreover, we expect steady contributions from acquisitions to support revenue growth. Continued share buybacks and dividend payments are the other encouraging factors.

On the other hand, decreasing organic revenue growth, tough competition from International Business Machines Corporation and Fiserv Inc., and a high debt burden remain concerns.

DST SYSTEMS Price and EPS Surprise

Earnings Whispers?

Our proven model does not conclusively show that DST Systems will beat earnings this quarter. This is because 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. That is not the case here as you will see below.

Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate stand at $1.48 per share. Hence, the difference is 0.00%.

Zacks Rank: DST Systems’ Zacks Rank #3 when combined with a 0.00% ESP makes surprise prediction difficult.

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

Stocks to Consider

Here are a couple of companies which, as per our model, have the right combination of elements to post an earnings beat this quarter:

Mattel, Inc. (MAT - Free Report) with an Earnings ESP of +1.43% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here, Inc. (AMZN - Free Report) with Earnings ESP of +6.98% and a Zacks Rank #1.

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