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Is Sempra Energy (SRE) Poised for a Beat in Q3 Earnings?

Sempra Energy SRE is set to report third-quarter 2017 results on Oct 30, before the market opens.

Last quarter, the company posted a positive earnings surprise of 37.50%. Moreover, it surpassed the Zacks Consensus Estimate in the trailing four quarters, with an average beat of 14.78%.

Let’s see how things are shaping up prior to this announcement.

Why a Likely Positive Surprise?

Our proven model shows that Sempra Energy may beat earnings estimates because it has the right combination of two key components.

Zacks Rank: Sempra Energy currently carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings.  You can see the complete list of today’s Zacks #1 Rank stocks here.

Zacks ESP: Sempra Energy has an Earnings ESP of +0.72%. This is because the Most Accurate estimate is pegged at $1.06, higher than the Zacks Consensus Estimate of $1.05. A favorable Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

The combination of Sempra Energy’s Zacks Rank #3 and a positive ESP make us reasonably confident of a positive earnings beat.

Please note that 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.

Factors at Play

At the onset of the third quarter, Sempra Energy’s Mexican unit IEnova secured a liquid fuels project worth $155 million from the Mexican authority. Per the terms, IEnova will construct a receipt, storage and send-out liquid fuels marine terminal on the Mexican Gulf Coast. This deal will expand business operations for IEnova in Mexico by exploiting the booming energy market in the region.

We believe impacts from this project to get reflected in the company’s third-quarter sales growth. In line with this, the Zacks Consensus estimate for Sempra Energy’s third-quarter revenues is pegged at $2.78 billion, displaying a 9.5% annual upside.

Moreover, Sempra Energy faces foreign exchange exposure in Mexcio and South America, wherein it does not hedge additional costs. These might weigh on the company’s quarterly earnings. Nevertheless, during second-quarter earnings call, management declared that it expects to gain $30 million of additional hedge income in the second half of the year, which in turn will largely offset its year-to-date foreign exchange losses in Mexico. Surely, this additional hedge income will have a partial favorable impact on the company’s to-be-reported quarterly result.

Further, the Aliso Canyon gas leak event lead to an estimated loss of $832 million for the company by the end of the second quarter, higher than the prior-quarter figure. On a bright note, Sempra Energy received approval to reinstate natural gas injections at the Aliso Canyon storage field. However, management has expressed concern in relation to system reliability for resuming these gas injections this summer and in the coming winter given the limitations on targeted gas storage levels.

A disciplined cost-management system has been driving Sempra Energy’s earnings. In line with this, for the third quarter, our consensus estimate for the company’s earnings is pegged at $1.05, reflecting a year-over-year increase of 2.7%.

Sempra Energy Price, Consensus and EPS Surprise


Sempra Energy Price, Consensus and EPS Surprise | Sempra Energy Quote

Stocks That Warrant a Look

Here are some other players in the Utility sector that also have the right combination of elements to post an earnings beat this quarter.

NiSource, Inc. NI will report third-quarter results on Nov 1. The company has an Earnings ESP of +7.69% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Avista Corporation AVA has an Earnings ESP of +17.24% and a Zacks Rank #3. The company is slated to release third-quarter results on Nov 1.

Recent Peer Release

DTE Energy Company DTE reported third-quarter 2017 operating earnings per share of $1.48, which missed the Zacks Consensus Estimate of $1.53 by 3.3%. Operating earnings also declined 24.5% from the year-ago figure of $1.96.

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