What to look for

Cree (CREE) is expected to report a year-over-year profit decline on lower revenues in its report for the quarter ended June 2020. This well-known consensus forecast paints a good picture of the company’s earnings, but how actual results compare to these estimates is an important factor that could impact the near-term share price.

Shares could move higher if these key numbers meet expectations in the upcoming earnings report, due on August 18. On the other hand, if these key numbers are not met, 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, this maker of energy-efficient lighting is expected to report a quarterly loss of $0.20 per share, representing a year-over-year change of -281.8%.

Revenue is expected to be $198.77 million, down 20.9% from the year-ago quarter.

Estimate the trend of change

The consensus EPS estimate for the quarter has not changed over the last 30 days. 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. Our proprietary surprise prediction model, the Zacks Earnings ESP, is based on this insight.

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 the Cree?

For Cree, the Most Accurate Estimate is the same as the Zacks Consensus Estimate, which suggests there is no recent analyst view that differs from what was used to support the consensus estimate. This resulted in an earnings ESP of 0%.

On the other hand, the stock currently has a Zacks Rank of #3.

So this combination makes it difficult to confidently predict that Cree will outperform 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.

In the last quarter, it was expected that Cree would post a loss of $0.15 per share when it actually produced a loss of $0.14, delivering a surprise of +6.67%.

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.

Cree doesn’t seem like a compelling candidate to beat earnings. 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.

Want the latest recommendations from Zacks Investment Research? Today you can download the top 7 stocks for the next 30 days. Click to get this free report

Cree, Inc. (CREE): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research