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Analyst Blog: Earnings Preview - ESP

Zacks Equity Research

2 Technology Stocks Well Poised to Beat Earnings Estimates

AVGO OOMA

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We are in the last leg of the Q3 earnings season and seven out of 16 sectors have concluded their quarterly reporting. Retail is the only sector that has a substantial number of companies left to report.
 
As per the latest Zacks Earnings Preview, 455 S&P 500 members (91% of the index’s total membership) have already reported their results. Overall, earnings were up 3.9% from the same period last year on 2.7% higher revenues, with 72.7% beating earnings per share estimates and 55.4% coming ahead of revenue expectations.
 
Overall, earnings are now anticipated to grow 3.4% on 1.5% higher revenues on a year-over-year basis. The figures mark an improvement over Q2 earnings decline of 2.8% on 0.2% lower revenues.
 
Notably, after five consecutive quarters of year-over-year decline, earnings grew in Q3 driven by robust performance from the finance, business services and utilities sectors, which fully offset continued weak performance from energy.
 
Technology Earnings Growth Impressive
 
Contrary to expectations, technology (82% already reported) earnings grew a healthy 6.1% on revenue growth of 3.4% in Q3. The earnings and revenue beat ratios of 84% and 76%, respectively, were also impressive.
 
The strong growth reflected solid performance from industry giants like Intel Corp (INTC) and Microsoft (MSFT), which offset disappointing results from Apple (AAPL).
 
The rapid adoption of cloud was the common growth factor for these companies. Additionally, growing acceptance of artificial intelligence (AI) technology, personal assistants and Internet of Things (IoT) drove overall results.
 
We believe the rapid adoption of cloud-based technologies will be the key growth driver going ahead. Per IDC, IT spending on cloud infrastructure -- servers, enterprise storage, and Ethernet switches for the enterprise private cloud and co-location services -- will increase 15.5% in 2016 to $37.1 billion. The growth rate is particularly noticeable when compared to spending on traditional IT, which is expected to decline 4.4% in 2016.
 
How to Make the Right Pick?
 
With the existence of a number of industry players, finding the right stocks that have the potential to beat earnings could be a daunting task. Our proprietary methodology, however, makes it fairly simple for you. You could narrow down the list of choices by looking at stocks that have the combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP.
 
Earnings ESP is our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
 
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
 
Our Choices
 
Given below are two technology providers that have the right combination of elements to post an earnings beat this quarter:
 
Broadcom Limited (AVGO - Free Report) – Based in Singapore, Broadcom is a premier designer, developer and global supplier of a broad range of analog semiconductor devices and digital, mixed-signal and optoelectronics components and subsystems. The company is expected to benefit from rapid increases in data center IP and mobile data traffic to emerge as the undisputed leader in the enterprise storage market.
 
Moreover, Broadcom maintains an efficient global supply chain with a variable, low-cost operating model that enables it to maintain sustainable revenue growth and expand margins.
 
The company is expected to report fourth-quarter fiscal 2016 results on Dec 8. Currently, Broadcom has an Earnings ESP of +1.74% and carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.
 
Ooma Inc (OOMA - Free Report) – Palo Alto, CA-based Ooma provides communications solutions and other connected services to small business, home and mobile users. The company’s “Core Users” grew from roughly 481,000 as of Jan 31, 2014 to almost 800,000 as of Jan 31, 2016, representing a compound annual growth rate (CAGR) of approximately 29%.
 
As of Jul 31, 2016, Core Users increased to 869,000 driven by expanding Ooma Telo as well as small business customers. 
 
This Zacks Rank #3 stock has an Earnings ESP of +5.26%. The company is set to report third-quarter fiscal 2017 results on Nov 29.

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