What you need to know ahead of the Q2 release

The market expects Telephone & Data Systems (TDS) to post year-over-year results for the quarter ended June 2019, driven by higher revenues. This well-known consensus outlook is important when assessing a company’s earnings picture, but an important factor that can impact a company’s near-term share price is how actual results compare to estimates.

The earnings report could help the stock climb higher if these key numbers are better than expected. On the other hand, if they miss, the stock could fall.

While management’s discussion of business conditions during the earnings call will largely determine the sustainability of the immediate price change and future earnings expectations, it’s worth having partial insight into the likelihood of a positive EPS surprise.

Zacks Consensus Estimate

In the upcoming report, the parent company of US Cellular and TDS Telecom is expected to post quarterly earnings per share of $0.32 per share, representing a year-over-year change of +10.3%.

Revenue is expected to be $1.30 billion, up 3.3% from the same quarter last year.

Estimate the trend of change

The consensus EPS estimate for the quarter has been revised upwards by 2.04% over the last 30 days to the current level. This broadly reflects how analysts covering the data have collectively re-evaluated their initial estimates during this period.

Investors should note that the aggregate change does not necessarily reflect the direction of estimate revisions by each major analyst.

Price, consensus and EPS surprise

Whisper about earnings

Revisions to estimates prior to a company’s earnings release provide an indication of business conditions in the period in which the earnings are expected to be released. This insight is at the heart of our proprietary surprise prediction model, the Zacks Earnings ESP.

The Zacks Earnings ESP compares the Most Accurate Estimates to the Zacks Consensus Estimates for the quarter; The Most Accurate Estimate is a newer revision of the Zacks Consensus EPS estimate. The idea is that analysts reviewing their estimates just before an earnings release have the latest information, which could potentially be more accurate than what they and other consensus participants had previously predicted.

Thus, a positive or negative ESP reading theoretically indicates the likely deviation of actual earnings from consensus estimates. However, the predictive power of the model is only significant for positive ESP readings.

A positive Earnings ESP is a strong predictor of an earnings beat, especially when paired with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). Our research shows that stocks in this combination deliver a positive surprise nearly 70% of the time, and a solid Zacks Rank actually increases the predictive power of its Earnings ESP.

Please note that a negative earnings ESP reading does not mean a loss of earnings. Our research shows that it is difficult to predict earnings growth with any degree of confidence for stocks with negative ESP readings and/or a Zacks Rank of 4 (Sell) or 5 (Strong Sell).

How have the numbers changed for TDS?

For TDS, the Most Accurate Estimate is above the Zacks Consensus Estimate, suggesting analysts have recently become optimistic about the company’s earnings prospects. This resulted in an earnings ESP of +12.50%.

On the other hand, the stock currently sports a Zacks Rank of #1.

So this combination indicates that TDS is most likely to exceed the consensus EPS estimate.

Does the history of surprising results have any clue?

When calculating estimates of a company’s future earnings, analysts often consider how well the company has been able to match previous estimates. So it’s worth taking a look at the surprise history to gauge its impact on the upcoming issue.

For the last reported quarter, TDS was expected to post earnings of $0.36 per share when it actually produced earnings of $0.50, representing a surprise of +38.89%.

The company has beaten consensus EPS estimates three times over the last four quarters.

Bottom line

Improving or lacking earnings may not be the only basis for a stock’s value rising or falling. Many stocks lose value despite good earnings because of other factors that disappoint investors. Similarly, unforeseen catalysts help many stocks gain despite losing profits.

That said, betting on stocks that are expected to exceed earnings expectations increases your chances of success. Therefore, it is worth checking the company’s Earnings Rank and Zacks Rank before their quarterly release. Use our Earnings ESP filter to find the best stocks to buy or sell before they report.

TDS seems like a compelling earnings beat candidate. However, investors should also pay attention to other factors if they want to bet on or stay away from these stocks ahead of an earnings release.

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