Microsoft Corp.MSFT is set to report third-quarter fiscal 2015 results on Apr 23. Last quarter, the company posted a 10.0% positive earnings surprise. Let's see how things are shaping up for this announcement.
Factors at Play
Microsoft's second-quarter earnings of 77 cents beat the Zacks Consensus Estimate driven by its focus on segments like cloud and mobile.
Revenues of $26.47 billion were up 14.1% sequentially and 8% year over year, backed by strong demand across all its product lines. However, gross margins declined from the last quarter due to a change in sales mix favoring low-margin products and price discounts.
Microsoft's directional clarity and the decision to focus on fast-growing segments that play to its strengths have increased investors' optimism. Moreover, we believe that the company's services and technology are being used in more devices across the existing PC and mobile platforms, as well as emerging platforms like wearables and the Internet of Things. This should reflect on the third-quarter results.
On the flip side, Microsoft's Windows continues to struggle and Office attach (which remains largely related to Windows) is trending down.
Our proven model does not conclusively show that Microsoft will beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.
Zacks ESP: The Most Accurate estimate stands at 50 cents while the Zacks Consensus Estimate is higher at 51 cents. That is a difference of -1.96%.
Zacks Rank: Microsoft carries a Zacks Rank #4 (Sell).
We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Stocks to Consider
You could consider the following stocks with a positive Earnings ESP and a favorable Zacks Rank:
Valeant Pharmaceuticals International, Inc. VRX , with an Earnings ESP of +0.43% and a Zacks Rank #1 (Strong Buy).
Laboratory Corp. of America Holdings LH , with an Earnings ESP of +0.61% and a Zacks Rank #1.
Popular, Inc. BPOP , with an Earnings ESP of +9.86% and a Zacks Rank #1
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.