Red Hat Inc. RHT is set to report third-quarter fiscal 2016 results on Dec 17. In the last quarter, the company delivered a positive earnings surprise of 17.24%. On an average, Red Hat has delivered positive earnings surprise of 13.57% over the past four quarters. Let’s see how things are shaping up for this announcement.
Factors to Consider
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 in the public cloud segment over the long term.
Additionally, Red Hat’s strong product pipeline, continuing investments to expand product portfolio and partnerships with the likes of IBM Corp. IBM, Dell and Intel INTC will drive overall growth. The company struck a deal with Samsung to provide the next generation of mobile solutions.
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 over the next few quarters.
Given the good performance in the first half of the year, the company raised its fiscal 2016 outlook. The company now expects revenues to be round $2,044 million compared with $2,034 million expected earlier. For the third quarter, Red Hat projects revenues of $519 million to $523 million, and non-GAAP earnings per share of 47 cents. Non-GAAP operating margin is expected to be 23%.
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, 2 or 3 for this to happen. This is not the case here as you will see.
Zacks ESP: Red Hat currently has an Earnings ESP of -3.23%. This is because the Most Accurate estimate stands at 30 cents whereas the Zacks Consensus Estimate is pegged higher at 31 cents.
Zacks Rank: Red Hat has a Zacks Rank #3 (Hold), 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 momentum.
Stock to Consider
The following stock can be considered at the moment as our model shows that it has the right combination of elements to post an earnings beat in its upcoming release:
ConAgra Foods, Inc. CAG with an earnings ESP of +5.09% and a Zacks Rank #2 (Buy).
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