EMC Corp. (EMC) is set to report third-quarter 2014 results on Oct 22. Last quarter, the company posted a 5.71% negative surprise. The company has posted an average negative earnings surprise of 5.07% over the past four quarters.
Let’s see how things are shaping up for this announcement.
EMC Exploring Strategic Alternatives amid Growing Investor Activism
EMC has been exploring merger and other strategic options primarily due to underperformance of its core storage business. The weak results have led to aggressive activism from shareholders. Although EMC has nurtured merger propositions with the likes of H-P, Oracle, Cisco and Dell, nothing concrete has materialized yet.
Elliott Management, one of the five biggest shareholders (2% stake), has demanded that EMC spin off VMware, in which it has approximately 95% controlling stake. The hedge fund believes that the divestiture will unlock significant value for shareholders.
Although EMC rejected Elliott’s proposal, we believe that unless management can find another suitable option, it may eventually have to lower its stake in VMware, in order to pacify growing resentment among investors. This will remain an overhang on EMC’s share price in the near term.
Growth Factors this Past Quarter
We believe that growing competition in most of the markets EMC operate, will hurt revenue growth and margin expansion. However, strategic focus shifts toward cloud computing and Big Data are the major positive catalysts for EMC.
EMC’s growing market share in the emerging flash storage, with sizable contributions from flash storage products such as XtremIO arrays will drive the results.
Earnings Whispers?
Our proven model does not conclusively show that EMC is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 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 37 cents. Hence, the difference is of 0.00%.
Zacks Rank: EMC currently has a Zacks Rank #4 (Sell).
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 some companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:
Apple Inc. (AAPL), with an Earnings ESP of +4.62% and a Zacks Rank #2 (Buy).
Facebook (FB), with an Earnings ESP of +6.25% and a Zacks Rank #2.
Invensense (INVN), with an Earnings ESP of +10.00% and a Zacks Rank #2.
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