Healthways Inc. (HWAY) is expected to announce third-quarter 2014 numbers on Oct 23. Last quarter, the company beat the Zack Consensus estimate by a penny. Let’s see how things are shaping up for this announcement.
Factors at Play
Healthways had a better-than-expected second quarter with increased revenues. Management expects the profit margin to improve in the second half of the year, banking on significant revenue growth, including recognition of performance-based fees.
Healthways is making substantial progress on the renewal of the four big contracts. The pipeline of potential contracts has expanded to a large extent. The company’s population health services are also gaining substantial market traction, which can result in margin and revenue expansion.
Management assumes that strong cash flow along with reduced capital spending as a percentage of revenues, will inevitably trim down the debt-to-EBITDA ratio in the year.
Earnings Whispers?
Our proven model does not conclusively show that Healthways is likely to beat earnings this quarter as it does not have the right combination of two key ingredients. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1, or at least 2 or 3 for this to happen. That is not the case here, as you will see below.
Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently pegged at 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 8 cents.
Zacks Rank: Healthways carries a Zacks Rank #1 (Strong Buy) which increases the predictive power of ESP, but when combined with a 0.00% ESP, it 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.
Other Stocks to Consider
Here are some companies you may like to consider as our model shows they possess the right combination of elements to post an earnings beat this quarter:
Pacific Biosciences of California, Inc. (PACB) with an Earnings ESP of 36.84% and a Zacks Rank #2 (Buy).
Express Scripts Holding Co. (ESRX) with an Earnings ESP of 0.78% and a Zacks Rank #3 (Hold).
Heartware International Inc. (HTWR) with an Earnings ESP of 21.21% and a Zacks Rank #3 (Hold).
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