Changyou.com Limited CYOU is set to report third-quarter 2015 results on Oct 26. Last quarter, the company delivered a positive earnings surprise of 47.37%. Also, the company delivered positive earnings surprises in all the last four quarters, with an average beat of 124.60%. Let’s see how things are shaping up for this announcement.
Factors to Consider
We believe strength in both PC and mobile games is a key growth factor for Changyou. The company’s offerings like Tian Long Ba Bu (TLBB) have been well received. Also, the company unveiled TLBB 3D last year, which continues to drive demand. Changyou intends to issue TLBB 3D expansion pack in the second half of 2015.
In the wake of the company’s new mobile games Dashfire and Twin of Brothers underperforming expectations, Changyou has stepped up R&D efforts. The company expects to launch one to two in-house developed mobile games in the second half of 2015.
We believe that TLBB in combination with the other games will be a significant growth driver for Changyou.
However, the company has been facing operational challenges from the ongoing transition. Also, sluggishness in the online game and advertising businesses is resulting in compressed margins for Changyou.
Increasing expenses from game operations along with losses in the new RaidCall business remain the primary headwinds for the company. The company expects to complete divestment of 7Road this year.
Further, the company has already given soft revenue guidance for third quarter 2015, given declines in mobile games business. Revenues from PC games are expected to be stable.
Earnings Whispers
Our proven model does not conclusively show that Changyou 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, 2 or 3 for this to happen. That is not the case here as you will see below.
Zacks ESP: Changyou currently has an Earnings ESP of 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 55 cents.
Zacks Rank: Changyou carries a Zacks Rank #3 (Hold), which increases the predictive power of ESP. However, the company’s 0.00% ESP makes surprise prediction difficult.
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 some stocks that, as per our model, have the right combination of elements to post an earnings beat this quarter:
Facebook, Inc. FB with an Earnings ESP of +5.71% and a Zacks Rank #1 (Strong Buy).
Fiserv, Inc. FISV with an Earnings ESP of +3.09% and a Zacks Rank #2 (Buy).
Apple Inc. AAPL with an Earnings ESP of +1.60% and a Zacks Rank #2.
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