Digital Realty (DLR) Q3 Earnings: What's in the Offing?

Digital Realty Trust, Inc.DLR is scheduled to release third-quarter 2017 results on Oct 25, after the market closes .

Last quarter, this San Francisco, CA-based date center real estate investment trust (REIT) delivered a positive surprise of 3.36%. Results were supported by growth in revenues.

Over the trailing four quarters, the company beat the Zacks Consensus Estimate in two occasions, met estimates in the other, and missed in another, with an average beat of around 1.18%. This is depicted in the graph below:

Digital Realty Trust, Inc. Price and EPS Surprise

Digital Realty Trust, Inc. Price and EPS Surprise | Digital Realty Trust, Inc. Quote

Let's see how things are shaping up for Digital Realty prior to this announcement.

Factors to Consider

Data center REITs are experiencing a boom market amid growth in cloud computing, Internet of Things and big data, and an increasing number of companies opting for third-party IT infrastructure. This has been driving demand which is outpacing supply in top-tier data center markets. Therefore, despite enjoying high occupancy, the top-tier markets are absorbing new construction at a faster pace.

Additionally, improved outlook for economic growth is anticipated to fuel demand for data centers. Amid these, Digital Realty's focus on offering upgraded technology to entice clients is likely to bolster its revenue stream in the to-be-reported quarter.

In addition to this, the company is expected to ride on its growth curve backed by strategic acquisitions. In fact, it acquired Telx in October 2015 and a portfolio of eight high-quality, carrier-neutral data centers in Europe (Amsterdam, Frankfurt and London) in July 2016. We expect such diligent efforts to drive the company's top line in the quarter to be reported.

Amid these, the Zacks Consensus Estimate for third-quarter revenues is currently pegged at $593.2 million, indicating projected growth of around 8.6% year over year.

Also, in September, the company announced the completion of a merger with DuPont Fabros. This buyout helped the company reinforce its hyper-scale product offering and widen its blue-chip customer base.

Nevertheless, Digital Realty faces stiff competition in the industry. In fact, the company competes with several data-center developers, owners and operators, many of which enjoy ownership of similar assets in regions same as Digital Realty. Amid this, aggressive pricing pressure is likely to sustain in the data-center market, while robust growth in occupancy is anticipated to remain elusive.

Hence, prior to the third-quarter earnings release, there is lack of any solid catalyst. As such, the Zacks Consensus Estimate of funds from operations (FFO) per share for the third quarter remained unchanged at $1.49 over the past week.

However, Digital Realty's shares have rallied 25.6% year to date, outperforming 3.4% growth recorded by the industry .

Earnings Whispers

Our proven model does not conclusively show that Digital Realty will likely beat estimates 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 at least 3 (Hold) for this to happen. However, that is not the case here as you will see below.

Zacks ESP: The Earnings ESP is -0.26%. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank: Digital Realty's Zacks Rank #2 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings beat.

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 That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

CoreSite Realty CorporationCOR , slated to release third-quarter results on Oct 26, has an Earnings ESP of +1.01% and a Zacks Rank of 2. You can see the complete list of today's Zacks #1 Rank stocks here .

Extra Space Storage Inc.EXR , scheduled to release earnings on Nov 1, has an Earnings ESP of +2.23% and a Zacks Rank of 2.

Cousins Properties Inc.CUZ , slated to release quarterly numbers on Oct 25, has an Earnings ESP of +1.13% and a Zacks Rank of 3.

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.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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