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Will Red Hat (RHT) Pull Off a Surprise in Q3 Earnings?

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Red Hat (RHT - Free Report) is set to report third-quarter fiscal 2017 results on Dec 21. In the last quarter, the company delivered positive earnings surprise of 5.71%.

On an average, Red Hat has delivered a positive earnings surprise of 6.20% over the past four quarters.

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

Factors Influencing this Quarter

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 through its cloud actions, especially in the public segment. In addition, 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 continue to 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.

For the third quarter, Red Hat projects revenues to be in the range of $613 million to $623 million and non-GAAP earnings per share of 58 cents. The non-GAAP operating margin is expected to be 23.3%.

RED HAT INC Price and EPS Surprise

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

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 (Strong Buy), 2 (Buy) or 3 (Hold) 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 37 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Red Hat has a Zacks Rank #3, 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.

A Stock That Warrants a Look

Here’s a company that you may want to consider as our model shows that it has the right combination of elements to post an earnings beat in its upcoming release:

Cognex Corporation (CGNX - Free Report) has an Earnings ESP of +3.45% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

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