Will the Earnings Streak for Red Hat (RHT) Continue? - Analyst Blog

Red Hat Inc. ( RHT ) is set to report second-quarter fiscal 2015 results on Sep 18, 2014. In the previous quarter, the company delivered a positive earnings surprise of 9.09%. On an average, Red Hat has delivered positive earnings surprise of 12.72% in the last four quarters.

Let's see how things are shaping up for this quarter.

Growth Factors in the Past Quarter

For the first quarter of fiscal 2015, Red Hat expects revenues in the range of $432 to $436 million, which reflects year-over-year growth in the range of 15.4% to 16.5%. Management expects operating margin to be around 23%. The company reported non-GAAP operating margin of 25.2% in the year-ago quarter.

Non-GAAP earnings are expected in the range of 32 to 33 cents per share. Red Hat reported non-GAAP earnings of 35 cents per share in the year-ago comparable quarter.

Red Hat's strategy of sacrificing service revenues in order to increase subscription revenues over the long run is expected to hurt top-line growth in the next couple of quarters.

Nevertheless, Red Hat continues to gain market share and its Linux servers are well positioned to compete with Microsoft ( MSFT ) in the enterprise market. Moreover, strong product pipeline, continuing investments to expand product portfolio and partnerships with the likes of IBM, Dell and Intel will drive further growth.

Earnings Whispers

Our proven model does not conclusively show that Red Hat is likely to 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. This is not the case here as you will see below.

Zacks ESP: Red Hat currently has an Earnings ESP of 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 26 cents.

Zacks Rank: Red Hat has a Zacks Rank #3 (Hold), which when combined with a 0.00% ESP makes surprise prediction difficult.

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

Other Stocks to Consider

Here are a couple of stocks worth considering that, per our model, have the right combination of elements to post an earnings beat this quarter:

Micron Technology ( MU ), with an Earnings ESP of +3.70% and a Zacks Rank #1 (Strong Buy).

Blackberry Limited ( BBRY ), with an Earnings ESP of +50.00% and a Zacks Rank #2 (Buy).

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RED HAT INC (RHT): Free Stock Analysis Report

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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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