The market expects Red Hat (NYSE:RHT) to deliver a year-over-year increase in earnings on higher revenues when it reports results for the quarter ended August 2018. This widely known consensus outlook is important in assessing the company’s earnings picture, but it’s also a powerful factor that might influence the near-term RHT stock price.
This is especially true when you consider how the actual results compare to these estimates.
The Red Hat earnings report, which is expected to be released on Sept. 19, 2018, might help RHT stock move higher if these key numbers are better than expectations. On the other hand, if they miss, RHT stock may move lower.
While management’s discussion of business conditions on the earnings call will mostly determine the sustainability of the immediate Red Hat stock price change and future earnings expectations, it’s worth having a handicapping insight into the odds of a positive earnings-per-share surprise.
RHT Stock: Zacks Consensus Estimate
This open-source software company is expected to post quarterly earnings of 81-cents-per-share in its upcoming report, which represents a year-over-year change of +5.2%.
Revenues are expected to be $827.58 million, up 14.4% from the year-ago quarter.
Estimate Revisions Trend
The consensus EPS estimate for the quarter has been revised 0.76% higher over the last 30 days to the current level. This is essentially a reflection of how the covering analysts have collectively reassessed their initial estimates regarding RHT and Red Hat stock over this period.
Investors should keep in mind that the direction of estimate revisions by each of the covering analysts may not always be reflected in the aggregate change.
Price, Consensus and EPS Surprise
Earnings Whisper for Red Hat Stock
Estimate revisions ahead of a company’s earnings release offer clues to the business conditions for the Q2 period. Our proprietary surprise prediction model — the Zacks Earnings ESP (Expected Surprise Prediction) — has this insight on Red Hat stock at its core.
The Zacks Earnings ESP compares the Most Accurate Estimate to the Zacks Consensus Estimate for the quarter; the Most Accurate Estimate is a version of the Zacks Consensus whose definition is subject to change. The idea here is that analysts revising their estimates right before an earnings release have the latest information, which could potentially be more accurate than what they and others contributing to the consensus had predicted earlier.
Thus, a positive or negative Earnings ESP reading theoretically indicates the likely deviation of the actual earnings from the consensus estimate. However, the model’s predictive power is significant for positive ESP readings only.
A positive Earnings ESP is a strong predictor of an earnings beat, particularly when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). Our research shows that stocks with this combination produce a positive surprise nearly 70% of the time, and a solid Zacks Rank actually increases the predictive power of Earnings ESP.
Please note that a negative Earnings ESP reading is not indicative of an earnings miss. Our research shows that it is difficult to predict an earnings beat with any degree of confidence for stocks with negative Earnings ESP readings and/or Zacks Rank of 4 (Sell) or 5 (Strong Sell).
How Have the Numbers Shaped Up for RHT?
For RHT stock, the Most Accurate Estimate is higher than the Zacks Consensus Estimate, suggesting that analysts have recently become bullish on the company’s earnings prospects. This has resulted in an Earnings ESP of +0.03%.
On the other hand, stock in Red Hat currently carries a Zacks Rank of #3.
So, this combination indicates that Red Hat will most likely beat the consensus EPS estimate.
Does Earnings Surprise History Hold Any Clue?
While calculating estimates for a company’s future earnings, analysts often consider to what extent it has been able to match past consensus estimates. So, it’s worth taking a look at the surprise history for gauging its influence on the upcoming number.
For the last reported quarter, it was expected that Red Hat would post earnings of 68-cents-per-share, when it actually produced earnings of 72-cents-per-share, delivering a surprise of +5.88%.
Over the last four quarters, the company has beaten consensus EPS estimates four times.
Bottom Line on RHT
An earnings beat or miss may not be the sole basis for a stock moving higher or lower. Many stocks end up losing ground despite an earnings beat due to other factors that disappoint investors. Similarly, unforeseen catalysts help a number of stocks gain despite an earnings miss.
That said, betting on stocks that are expected to beat earnings expectations does increase the odds of success. This is why it’s worth checking a company’s Earnings ESP and Zacks Rank ahead of its quarterly release. Make sure to utilize our Earnings ESP Filter to uncover the best stocks to buy or sell before they’ve reported. RHT stock appears to be a compelling earnings-beat candidate.
However, investors should pay attention to other factors too for betting on Red Hat stock or staying away from it ahead of its earnings release.
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This article was originally published by Zacks Investment Research.