Prologis (PLD) Q2 Earnings May Disappoint: Stock To Suffer?

Prologis, Inc. (NYSE:PLD) is slated to report second-quarter 2016 results before the market opens on Jul 19. Last quarter, the company came up with a positive earnings surprise of 3.39%. In the trailing four quarters, the company reported positive earnings surprises twice, with an average beat of 1.66%.

The Zacks Consensus Estimate for funds from operations ("FFO") for the second quarter is currently pegged at 59 cents per share. Let’s see how things are shaping up for this announcement.

Factors to Consider

Demand for logistics infrastructure and efficient distribution networks has been increasing, thanks to robust demand from ecommerce users. In fact, the requirement for facilities to handle services like same-day delivery as well as reverse logistics is growing, leading to tightened vacancy rates amid a manageable supply of space.

In fact, according to a recent report by CBRE Group Inc. (NYSE:CBG) , in second-quarter 2016, industrial availability was 8.8%, denoting a 20 basis points (bps) dip from the prior quarter. This also marked the lowest level since second-quarter 2001.

Prologis has been capitalizing on this trend and its rental rates are expected to have experienced growth throughout the second quarter. Same store net operating income is also projected to move up.

Yet, any robust improvement in the performance of this industrial real estate investment trust (REIT) might be limited given the fact that the recovery in the industrial market has been continuing for long. The CBRE study reveals that the second-quarter decline in the availability rate marks its 25th straight quarter of decrease. As such, chances of a striking fall in availability rates or solid growth in rents are less. Rising competition also adds to its woes. Further, FFO per share is likely to be hurt given the potential dilution from increased dispositions.

Earnings Whispers?

Our proven model does not conclusively show that Prologis will beat on earnings this season. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. However, 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 59 cents. This leads to an Earnings ESP of 0.00% for Prologis, which represents the percentage difference between the two.

Zacks Rank: Prologis currently has a Zacks Rank #3. Though a favorable Zacks Rank increases the predictive power of ESP, the company’s ESP of 0.00% makes our surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are two other REITs that you may want to consider as our model shows that they have the right combination of elements to post an earnings beat this quarter:

SL Green Realty Corp. (NYSE:SLG) , slated to release earnings results on Jul 20, has an Eearnings ESP of +5.98% and a Zacks Rank #3.

American Campus Communities, Inc. (NYSE:ACC) , slated to release earnings results on Jul 25, has an Earnings ESP of +1.89% and a Zacks Rank #2.

Note: All EPS numbers presented in this write up represent funds from operations (FFO) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.