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Can Prologis (PLD) Pull off a Surprise in Q3 Earnings?

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We expect Prologis, Inc. (PLD - Free Report) to beat expectations when it reports third-quarter 2016 results before the opening bell on Oct 20.

Prologis’ Zacks Consensus Estimate for funds from operations (FFO) for the third quarter is currently pegged at 70 cents per share. Last quarter, the company had recorded a positive earnings surprise of 1.69%. In fact, it reported positive results in three out of the four trailing quarters, with an average positive earnings surprise of 2.08%.

The graph below depicts the decent surprise history of the company.

PROLOGIS INC Price and EPS Surprise


PROLOGIS INC Price and EPS Surprise | PROLOGIS INC Quote

Why a Likely Positive Surprise?

Our proven model shows that Prologis is likely to beat estimates because it has the right combination of two key ingredients. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) to beat estimates, and Prologis has the right mix.

Zacks ESP: The Earnings ESP, which represents the percentage difference between the Most Accurate estimate of 72 cents and the Zacks Consensus Estimate of 70 cents, is +2.86%. This is a major indicator of a likely positive surprise.

Zacks Rank: Prologis carries a Zacks Rank #3.

This combination of Prologis’ Zacks Rank #3 and positive ESP makes us reasonably confident of a positive surprise this season.

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

What's Driving the Better-than-Expected Earnings?

Demand for space has been pretty high in the industrial REITs market. In fact, amid an economic expansion, e-commerce boom and heightened urbanization demand for facilities have increased for handling services like same-day delivery and reverse logistics. This has tightened vacancy rates amid a manageable supply of space.

Also, with a wider customer base, companies are opting for supply-chain consolidation, resulting in greater demand for logistics infrastructure and efficient distribution networks. This, in turn, is creating scope for the industrial REITs to flourish.

In fact, according to a study by the commercial real estate services’ firm – CBRE Group Inc. (CBG - Free Report) – the industrial REIT market continued its longest stretch of recovery, with the 26th straight quarter of declining availability. Notably, availability contracted 20 basis points (bps) sequentially to 8.4% in the third quarter.

Prologis continues to capitalize on this trend, with its rental rates expected to have experienced growth throughout the third quarter. Same store net operating income for the company is also projected to move up.

Stocks to Consider

Here are two other REITs you may want to consider as our model shows that they have the right combination of elements to post an earnings beat this quarter:

PS Business Parks Inc. (PSB - Free Report) , slated to release earnings results on Oct 25, has an Earnings ESP of +1.43% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Essex Property Trust Inc. (ESS - Free Report) , slated to release earnings results on Oct 27, has an Earnings ESP of +0.36% and a Zacks Rank #3.

Note: All EPS numbers presented in this write up represent funds from operations (FFO) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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