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Software Stocks' Earnings Due on Jul 20: MSFT, MANH, CHKP

The second-quarter earnings season has just started with 30 S&P 500 members, representing 9.3% of the index’s total market capitalization, having already reported their results.

Per the latest Earnings Preview, total earnings of these companies are up 13.8% on a year-over-year basis (83.3% of the companies beat EPS estimates) while total revenue is up 6% on a year-over-year basis (almost 83.3% of the companies also beat top-line estimates).

Of these 30 S&P 500 companies, only four belonged to the finance sector. However, they accounted for 22% of the sector’s total market capitalization in the index. Improved results from these companies have boosted the aggregate growth picture. Total earnings of these four companies are up 6.2% from the same period last year on 2.5% higher revenues.

Rising Earnings Expectations

More than 200 companies are set to report results this week (Jul 17-20), including 68 S&P 500 members. Total second-quarter earnings are now expected to increase 6.6% (up from the previous expectation of 5.6%) from the year-ago quarter on revenue growth of 4.5%.

Technology is one of the five sectors projected to report the strongest growth in the second-quarter. The other four are Energy, Aerospace, Construction and Industrial Products.

We note that the technology sector has been a prolific performer on a year-to-date basis. The sector is benefiting from increasing demand for cloud-based platforms, growing adoption of Artificial Intelligence (AI) solutions, Augmented/Virtual reality devices, autonomous cars, advanced driver assisted systems (ADAS) and Internet of Things (IoT) related software.

Moreover, growing incidents of cyber attack have also increased the demand for cybersecurity software providers.

Software companies form a significant part of the technology sector. We note that one of the most-tracked software ETFs– iShares North American Tech-Software ETF (IGV) –has gained 30.5% on a year-to-date basis, which is significantly better than the S&P 500’s gain of 10.1% and Technology Select Sector SPDR ETF’s (XLK) return of 18.1%.

Here we take a look at three software companies that are set to report their quarterly earnings on Jul 20:

Microsoft MSFT is unlikely to beat fiscal fourth-quarter 2017 expectations as it has an unfavorable combination of a Zacks Rank #2 (Buy) and an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

This is because, as per our proven model, a company needs to have both a positive Earnings ESP and a Zacks Rank #1(Strong Buy), 2 or 3 (Hold) to deliver an earnings surprise. You can see the complete list of today’s Zacks #1 Rank stocks here.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

However, we note that Microsoft beat the Zacks Consensus Estimate in the trailing four quarters, resulting in an average positive surprise of 10.4%.

We believe accelerated adoption of Microsoft’s cloud platform Azure, Windows 10 and Office 365 will play an important role. (Read More: Will Azure Act in Favor of Microsoft in Q4 Earnings?)

Microsoft has also outperformed the S&P 500 on a year-to-date basis. While the stock returned 19.3%, the index gained 11.4% over the same time frame.



Similarly, Manhattan Associates Inc. MANH is unlikely to beat second-quarter 2017 estimates as it has an unfavorable combination of an Earnings ESP of -2.27% and a Zacks Rank #3. Notably, the company has beaten the Zacks Consensus Estimate in each of the preceding four quarters. It has an average four-quarter positive surprise of 10.87%.

We believe the growing demand for supply chain management software is a positive for the company. Management expects earnings per share to be up sequentially by about 12% to 17%.

Notably, shares have lost 12.7% on a year-to-date basis in contrast to the Zacks Computer Software industry’s rise of 23.6%.



However, Check Point Software Technologies Ltd CHKP looks likely to beat second-quarter fiscal 2017 estimates as it has a favorable combination of a Zacks Rank #3 and an Earnings ESP of +0.90%.

We believe that strong demand for cybersecurity solutions and rapid adoption as well as frequent enhancements of Check Point’s data center product line bode well for the company’s overall growth. (Read More: Check Point to Post Q2 Earnings: Is a Beat in Store?)

Notably, Check Point has beaten the Zacks Consensus Estimate in three of the four preceding quarters with an average positive surprise of 5.64%. Moreover, the company has outperformed the Zacks categorized Security industry on a year-to-date basis. While the stock has gained 35.7%, the industry posted an increase of 22.7%.



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Check Point Software Technologies Ltd. (CHKP): Free Stock Analysis Report
 
Microsoft Corporation (MSFT): Free Stock Analysis Report
 
Manhattan Associates, Inc. (MANH): Free Stock Analysis Report
 
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