Microsoft Corp. (MSFT) is set to report third quarter fiscal 2013 results on Apr 18. Last quarter, it posted an 8.00% positive surprise. Let’s see how things are shaping up for this announcement.
Growth Factors this Past Quarter
Microsoft’s sales growth rates in the second quarter of 2013 were higher than the first quarter as well as the year-ago period driven by higher Windows and Office sales, the Surface tablet and volume licensing deals.
However, the quarter was weak for Microsoft in terms of margin expansion. We believe that unfavorable mix and increased expenditure on the launch of various new products will continue to hurt margins.
Though Microsoft is taking drastic measures to keep itself relevant in the industry, the company is battling the slump in the PC market just like all other PC makers.
The technology giant is yet to gain traction for its smartphone and tablet OS. Though Microsoft is bullish about its Surface tablet and is rapidly strengthening its global retail presence, the product has not yet stirred the interest of users. Despite these efforts, we believe that Microsoft will see notable success this year only if PC sales start to grow again at normal rates.
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 (Read: Zacks Earnings ESP: A Better Method) 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 $0.70 while the Zacks Consensus Estimate is higher at $0.74. This comes to a difference of -5.41%.
Zacks Rank #3 (Hold): Microsoft’s Zacks Rank #3 (Hold) lowers the predictive power of ESP because the Zacks Rank #3 when combined with a negative ESP makes surprise prediction difficult. 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.
Other Stocks to Consider
Here are some other companies you may want to consider as our model shows that they have the right combination of elements to post an earnings beat this quarter:
Sandisk Corp. (SNDK), with an ESP of +9.09% and a Zacks Rank #1 (Strong Buy)
Netflix Inc. (NFLX), Earnings ESP of +5.56% and Zacks Rank #2 (Buy)
Amazon.com (AMZN), Earnings ESP of +190.0% and Zacks Rank #3 (Hold)
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