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Key Factors to Impact Digital Realty's (DLR) Q2 Earnings

Zacks Equity Research

Digital Realty Trust DLR is scheduled to release second-quarter 2019 results on Jul 30, after the market closes.

In the last reported quarter, this San Francisco, CA-based data-center real estate investment trust (REIT) delivered a positive surprise of 4.85% in terms of funds from operations (FFO) per share. Results were supported by growth in revenues.

The company has a decent surprise history. In fact, over the trailing four quarters, the company beat the Zacks Consensus Estimate on all four occasions — the average beat being 2.30%. 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. price-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

With growth in cloud computing, Internet of Things and big data, and an increasing number of companies opting for third-party IT infrastructure; data-center REITs are experiencing a boom market. Also, the estimated growth rates for the artificial intelligence, autonomous vehicle and virtual/augmented reality markets will remain robust over the next five to six years. In fact, demand is outpacing supply in top-tier data center markets and despite enjoying high occupancy, the top-tier markets are absorbing new construction at a faster pace.

Additionally, according to a forecast by Cisco, global data center-to-data center IP traffic is anticipated to witness a compound annual growth rate (CAGR) of 25% over 2016-2021, while global cloud IP traffic is estimated to grow at a CAGR of 27% over 2016-2021. Further, per Gartner’s reports, worldwide IT-spending growth is projected to increase 3.2% in 2019, while worldwide server shipments are expected to be up 4% in 2019. These are anticipated to drive demand for data centers.

Such strong fundamentals of the data-center market are likely to help Digital Realty ride on its growth curve in the to-be-reported quarter. The company is also banking on strategic acquisitions and development efforts, which are expected to boost its top-line growth.

During the second quarter, Digital Realty expanded in Dublin with the official launch of its second data center on the company’s Profile Park campus. This brought the company’s total investment in Ireland to more than €200 million, indicating its focus to strengthen regional footprint, given the long-term local demand. Also, in an effort to expand its presence in Japan, Digital Realty announced that its 50/50 joint venture with Mitsubishi Corporation — MC Digital Realty — has opened the second facility, KIX11, on its Osaka connected campus.

Furthermore, the company has enhanced its presence in Europe, Australia and Asia in recent years through the development of high-quality facilities. We believe such expansion efforts will drive the company’s top and bottom lines in the quarter under consideration. Amid these, the Zacks Consensus Estimate for the second-quarter total revenues is $808.7 million, indicating 7.1% year-over-year growth.

However, competition has intensified, given the solid growth potential in the data-center real estate market. This is likely to have led to aggressive pricing pressure in the quarter under review. In addition to this, interest-expense burden remains a concern, with the company having a substantial debt position.

As such, the Zacks Consensus Estimate for FFO per share of $1.63 indicates a decrease of 1.8% from the prior-year reported figure. Also, the estimate has witnessed a marginal downward revision in the past two months.
    
Here is what our quantitative model predicts:

Digital Realty does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
 
Earnings ESP: The Earnings ESP for Digital Realty is 0.00%.

Zacks Rank: Digital Realty has a Zacks Rank of 3 (Hold), which increases the predictive power of ESP. However, we also need a positive ESP to be confident of a positive surprise.

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:

Life Storage, Inc. LSI, scheduled to release earnings on Jul 31, has an Earnings ESP of +0.12% and currently carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Federal Realty Investment Trust FRT, slated to report second-quarter results on Aug 1, has an Earnings ESP of +0.57% and currently carries a Zacks Rank of 2.

Kimco Realty Corporation KIM, set to report quarterly results on Jul 25, has an Earnings ESP of +2.49% and currently carries a Zacks Rank of 3.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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