Starwood Property Trust (STWD) earnings are expected to decline in the third quarter

Wall Street is expecting a year-over-year decline in earnings on higher revenue when Starwood Property Trust (STWD) reports results for the quarter ended September 2022. While this widely known consensus outlook is important in assessing the company’s earnings picture, a significant factor that could impact the company’s near-term stock price is how actual results compare to these estimates.

The earnings report, due on November 9, 2022, 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 the durability of the immediate price change and future earnings expectations will largely depend on management’s discussion of business conditions on the earnings call, it is worth limiting the likelihood of a positive EPS surprise.

Zacks Consensus Estimate

The commercial real estate investment trust is expected to post quarterly earnings of $0.51 per share in its upcoming report, representing a year-over-year change of -1.9%.

Revenue is expected to be $408.53 million, up 35.2% from the year-ago quarter.

Estimate the trend of change

The consensus EPS estimate for the quarter has been revised down 4.72% over the past 30 days to current levels. This is essentially a reflection of how the analysts covering the aggregate have reassessed their initial estimates during this period.

Investors should note that the direction of each analyst’s estimate revisions will not always be reflected in the aggregate change.

Whispers about earnings

Estimate revisions ahead of a company’s earnings release provide a clue as to business conditions in the period in which the earnings are due to be released. Our proprietary surprise prediction model, the Zacks Earnings ESP (Expected Surprise Prediction), is based on this knowledge.

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 Earnings ESP reading theoretically indicates a 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 combined with a Zacks Rank #1 (Strong Buy), 2 (Buy), or 3 (Hold). Our research shows that stocks with this combination deliver a positive surprise almost 70% of the time, and a solid Zacks Rank actually boosts the predictive power of Earnings ESP.

Please note that a negative Earnings ESP reading does not indicate a missed profit. Our research shows that it is difficult to predict earnings beats with any degree of confidence for stocks with negative Earnings ESP readings and/or Zacks Ranks of 4 (Sell) or 5 (Strong Sell).

How are the numbers shaping up for Starwood Property Trust?

In the case of Starwood Property Trust, the Most Accurate Estimate is lower than the Zacks Consensus Estimate, suggesting that analysts have recently become bearish on the company’s earnings outlook. This has resulted in an Earnings ESP of -1.32%.

On the other hand, the company’s stock currently has a Zacks Rank #3.

Therefore, it is difficult to clearly predict that Starwood Property Trust will beat consensus earnings per share estimates.

Are the financial results surprising? Does history matter?

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 history of surprises to assess its impact on the upcoming issue.

In the last reported quarter, Starwood Property Trust was expected to post earnings of $0.49 per share when it actually produced earnings of $0.51, delivering a surprise of +4.08%.

The company has topped consensus earnings per share estimates three times over the last four quarters.

Bottom Line

Beating or missing earnings may not be the only basis for a stock rising or falling. Many stocks lose ground despite beating gains due to other factors that disappoint investors. Similarly, unforeseen catalysts help many stocks gain despite missing earnings.

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.

Starwood Property Trust doesn’t seem like a compelling candidate for an earnings beat, but there are other factors investors should look at if they want to bet against or stay away from this stock ahead of its earnings release.

Expected results of an industry player

Another stock in the Zacks REIT and Equity Trust industry, Two Harbors Investments (TWO), is soon to report earnings of $0.16 per share for the quarter ended September 2022. This estimate indicates a year-over-year change of -33.3%. Revenue for the quarter is expected to be $52.75 million, up 272.5% from the year-ago quarter.

The consensus EPS estimate for Two Harbors Investments has been revised 68.2% down over the past 30 days to current levels. However, the equal Most Accurate Estimate resulted in an Earnings ESP of 0.00%.

This ESP combined with the Zacks Rank #3 (Hold) makes it difficult to confidently predict that Two Harbors Investments will surpass the consensus EPS estimate. The company has topped consensus EPS estimates three times over the last four quarters.

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