Seagate (STX) Q4 Earnings: Can The Stock Pull A Surprise?

Seagate Technology Public Limited Company (NASDAQ:STX) is set to report fourth-quarter fiscal 2016 results on Aug 1. Last quarter, the company posted a negative earnings surprise of 42.11%. However, Seagate has surpassed the Zacks Consensus Estimate in three of the last four quarters with an average positive surprise of 0.51%.

Let us see how things are shaping up for this announcement.

Factors to Consider

This data storage solution provider recently announced preliminary results for the fourth quarter. It expects higher revenues and margins in the quarter on the back of rising demand for the company’s HDD products as well as its cost cutting initiatives.

Seagate now expects revenues to be $2.65 billion, compared with its previous guidance of $2.3 billion. Non-GAAP gross margin is anticipated to be 25.8%, up from its earlier forecast of 23%. Non-GAAP operating expenses are, however, still anticipated to be nearly $440 million.

The company expects unit shipments in the quarter to be roughly 37 million, translating to a total average capacity per drive of 1.7 terabytes and average selling price (ASP) per unit of $67.

According to Steve Luczo, Chairman and Chief Executive Officer of Seagate, “We believe the long-term trend of exabyte storage demand growth exceeding HDD areal density growth remains intact for the foreseeable future. Seagate will continue to evolve its product offering, technology investment and manufacturing footprint to best serve our customers with the world’s most advanced and cost advantaged HDD products."

Seagate stands to benefit from its strength in hybrid drives. The company remains focused on the enterprise side, where it could acquire a number of higher-margin businesses. Synergies from completed acquisitions and product innovations are expected to boost results in the to-be-reported quarter.

However, continuous decline in PC shipments will likely hurt the company’s fourth-quarter results. Notably, HDDs are still extensively used in PCs and Seagate derives the bulk of its revenues from these devices.

In fact, according to Gartner’s latest report, PC shipments (including premium ultra-mobiles) in second-quarter 2016 fell 5.2% year over year to 64.3 million units. An appreciating U.S. dollar, consumer segment’s lack of interest in new PCs as they opt for inexpensive mobile devices, and a delay in fully deploying Windows 10 operating systems by enterprises were the main reason behind the dismal performance.

Earnings Whispers

Our proven model does not conclusively show that Seagate will beat earnings this quarter. 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) to post an earnings beat. That is not the case here, as you will see below.

Zacks ESP: Seagate has an Earnings ESP of 0.00% since both the Most Accurate estimate and the Zacks Consensus Estimate stand at 60 cents.

Zacks Rank: Seagate’s Zacks Rank #2, when combined with its 0.00% ESP, makes surprise prediction difficult.

Note that 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 a negative estimate revisions momentum.

Stocks to Consider

Here are a few stocks 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:

Mercury Systems Inc. (NASDAQ:MRCY) , with an Earnings ESP of +26.67% and a Zacks Rank #3.

Qualys Inc. (NASDAQ:QLYS) , with an Earnings ESP of +12.50% and a Zacks Rank #3.

Pure Storage Inc. (NYSE:PSTG) , with an Earnings ESP of +5.88% and a Zacks Rank #3.