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Digital Realty (DLR) to Post Q2 Earnings: What's in Store?

Digital Realty Trust, Inc. DLR is slated to report second-quarter 2017 earnings on Jul 27, after the market closes.

Last quarter, this San Francisco, CA-based date center real estate investment trust (REIT) delivered a positive surprise of 2.04%. Results were driven 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 1.44%.  This is depicted in the graph below:

Digital Realty’s shares have rallied 14.5% year to date, outperforming the industry’s gain of 3.3%.

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. 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.

Moreover, improved outlook for economic growth is anticipated to drive 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.

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

Notably, in Jun 2017, the company announced that it is set to acquire DuPont Fabros Technology, Inc. DFT in an all-stock transaction for an enterprise value of about $7.6 billion. The move would enhance Digital Realty’s portfolio in top U.S. data center metro areas across Northern Virginia, Chicago and Silicon Valley.

However, 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.

Furthermore, per the management, second and third quarter results are anticipated to reflect higher property tax accruals, increased general and administrative expense associated with promotions, merit increases and timing of stock grants. Apart from these, it would bear the impact of settlement of the residual 2.4 million shares subject to the forward sale agreements the company entered into last May.

Hence, prior to the second-quarter earnings release, there is lack of any solid catalyst. As such, the Zacks Consensus Estimate of FFO per share for the to-be-reported quarter remained unchanged at $1.48 over the past seven days.

Earnings Whispers

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

Zacks ESP: The Earnings ESP for Digital Realty is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $1.48. 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:

Liberty Property Trust LPT, slated to release second-quarter results on Jul 25, has an Earnings ESP of +1.61% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

CyrusOne Inc. CONE, scheduled to release earnings on Aug 2, has a Zacks Rank #2 and an Earnings ESP of +2.70%.

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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Digital Realty Trust, Inc. (DLR): Free Stock Analysis Report
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