Seagate Technology plc STX is set to report third-quarter fiscal 2015 results on Apr 17. Last quarter, the company posted a negative earnings surprise of 0.74%. Let us see how things are shaping up for this announcement.
Factors to Consider
Seagate’s second quarter fiscal 2015 results were below our expectations. The quarter also saw margin contractions.
PCs remain the primary users of HDDs and Seagate derives the bulk of its revenues from these devices. It is the second largest manufacturer of HDDs in the U.S. with a 40% share. Therefore, the cannibalization of PCs by mobile devices will continue to affect Seagate’s results.
The declining first quarter of 2015 PC numbers indicate protracted weakness in PC HDDs as well, negatively impacting Seagate’s financial position.
To deal with the situation, Seagate is focusing on the enterprise side, which is a key growth area in the information technology sector. Anticipating a potential acceleration in cloud deployments (due to exponential growth in data storage in the cloud), Seagate is investing heavily to deliver high-capacity storage devices that would support expansion of cloud infrastructure and cloud applications. We believe that this will boost margins and reduce Seagate’s dependence on the PC market.
Moreover, the company is gaining traction with its new products focused on surveillance and the analytics market as well as other hybrid drives. Also, Seagate’s cloud-based applications have drawn customer interest.
Nonetheless, competition from Western Digital Corp. WDC and SanDisk Corp. cannot be ignored.
Earnings Whispers?
Our proven model does not conclusively show that Seagate will 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: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, currently stands at -9.26%. This is because the Most Accurate estimate of 98 cents is lower than the Zacks Consensus Estimate of $1.08 per share.
Zacks Rank: Seagate has a Zacks Rank #4 (Sell). We caution against stocks with 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 a couple of companies, which you may consider as our model shows that they have the right combination of elements to post an earnings beat this quarter:
Broadcom Corp. BRCM with Earnings ESP of +5.00% and a Zacks Rank #1 (Strong Buy)
Apple Inc. AAPL with Earnings ESP of +10.33% and a Zacks Rank #2 (Buy)
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