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SAP (SAP) to Report Q1 Earnings: Can the Stock Surprise?

SAP SE SAP is slated to report first-quarter 2016 results on Apr 20. Last quarter, the company posted a negative surprise of 4.9%. However, for the trailing four quarters, the company reported an average positive surprise of 3.6%.

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

Factors to Consider

SAP’s first-quarter performance, like the few previous quarters, is expected to be steered by strong cloud business growth and growing adoption of S/4HANA applications. S/4HANA offerings, considered as a powerful “mission critical control center” for businesses seeking digital transformation, have gained market traction. 

Moreover, SAP’s human capital management (‘HCM’) applications and Internet of Things (‘IoT’) & Big Data platform powered by SAP HANA have witnessed consistent client gains over the past couple of quarters and are expected to accelerate top- and bottom-line growth in the first quarter as well. Moreover, SAP’s extensive business network is expected to supplement its growth momentum in first-quarter 2016.

Earlier this month, the company offered a sneak peek into its first-quarter 2016 earnings. Per the preliminary assessment, the company projects IFRS total revenue growth of 5% and operating profit increase of 28%, both on a year-over-year basis. The company’s cloud and software business during first-quarter 2016 is expected to benefit from double-digit growth in cloud subscriptions and support revenues.

The report has highlighted strong performance in the EMEA and APJ regions which is expected to drive a sizable portion of sales growth during the quarter. Moreover, bottom-line performance and operating profits are expected to be driven by diligent business transformation initiatives undertaken by the company in 2015 thereby supplementing its first-quarter financials.

We also believe SAP’s continuous product upgrade efforts and its strategic partnerships will bolster the growth momentum in the quarter and beyond. Some of the notable deals signed in the first quarter include the one with Vodafone for the launch of the IoT foundation bundle for SAP HANA and the collaboration with digital identity and access solutions provider Certified Security Solutions.

Also, the launch of SAP HANA Vora and the tie-up with Apache Software Foundation along with the introduction of SAP Integrated Business Planning 6.1 application and the upgrade of proprietary human resource management solution, SAP SuccessFactors Performance & Goals, are expected to propel growth. 

Despite these bullish factors, stiff competition in the IT services industry exposes SAP to pricing risks which can prove to be a major drag. This apart, the company statistics hint at possibilities of significant fluctuations in its revenues owing to the inherent seasonality in clients’ technology spending. In this regard, the first quarter of the company is its shortest seasonal quarter that is likely to impact the top-line performance adversely.

Moreover, the ongoing volatility in Latin America, particularly in Brazil, and lackluster performance in North America are likely to weigh on the company’s financials in the to-be-reported quarter. 

Earnings Whispers

Our proven model does not conclusively show that SAP is likely to beat 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) for this to happen. That is not the case here as you will see below.

Zacks ESP: Earnings ESP for the company currently stands at 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 56 cents.

Zacks Rank: SAP’s Zacks Rank #3 increases the predictive power of ESP. However, the company’s 0.00% ESP makes a surprise prediction difficult.

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

Stocks That Warrant a Look

Here are some stocks you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Adobe Systems Incorporated ADBE has an Earnings ESP of +1.92% and a Zacks Rank #2.

Sanofi SNY has an earnings ESP of +4.17% and a Zacks Rank #2.

Host Hotels & Resorts, Inc. HST has an earnings ESP of +2.63% and a Zacks Rank #3.

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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
 
SANOFI-AVENTIS (SNY): Free Stock Analysis Report
 
ADOBE SYSTEMS (ADBE): Free Stock Analysis Report
 
SAP AG ADR (SAP): Free Stock Analysis Report
 
HOST HOTEL&RSRT (HST): Free Stock Analysis Report
 
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