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Seagate (STX) Q3 Earnings: Stock Likely to Miss Estimates?

Seagate Technology Public Limited Company STX is set to report third-quarter fiscal 2016 results on Apr 29. Last quarter, the company posted a positive earnings surprise of 15.49%. Notably, Seagate has surpassed the Zacks Consensus Estimate in three of the last four quarters and met the same in one, with an average positive surprise of 11.04%.

Let us see how things are shaping up for this announcement.

Factors to Consider

HDDs are still extensively used in PCs and Seagate derives the bulk of its revenues from these devices. Therefore, the continuous decline in PC shipments will likely hurt the company’s third-quarter results.

According to data released recently by International Data Corporation (“IDC”), PC shipments in the quarter ended Mar 31, 2016 tanked 11.5% year over year to 60.6 million units. IDC highlighted that the strengthening U.S. dollar, lack of consumer interest in new PCs amid the growing popularity of inexpensive mobile devices, and the delay in fully deploying Windows 10 operating systems by enterprises, as primary reasons behind the dismal performance of the PC industry.

Nonetheless, Seagate stands to benefit from the strength in its hybrid drives. Also, the company is focused on the enterprise side, where it could acquire higher-margin businesses. Synergies from acquisitions and product innovations will boost results in the to-be-reported quarter.

However, sluggish macroeconomic conditions and a flattish price environment are the near-term headwinds. Moreover, the acquisition of SanDisk by Western Digital WDC is likely to pose newer challenges for Seagate over the long run.

Earnings Whispers

Our proven model indicates that Seagate will likely miss earnings this quarter. 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) to post an earnings beat. That is not the case here, as you will see below.

Zacks ESP: This is because the Most Accurate estimate stands at 38 cents, while the Zacks Consensus Estimate is pegged higher at 42 cents. That results in a difference of -9.52%.

Zacks Rank: Seagate has a Zacks Rank #4 (Sell). As it is, we caution against stocks with a Zacks Rank Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks to Consider

Here are a couple of stocks, which you may want to consider instead, as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Align Technology Inc. ALGN, with an Earnings ESP of +5.13% and a Zacks Rank #2.

Benefitfocus Inc. BNFT, with an Earnings ESP of +4.00% and a Zacks Rank #2.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
WESTERN DIGITAL (WDC): Free Stock Analysis Report
SEAGATE TECH (STX): Free Stock Analysis Report
ALIGN TECH INC (ALGN): Free Stock Analysis Report
BENEFITFOCUS (BNFT): Free Stock Analysis Report
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