Inspire Medical Systems (INSP) expected to see third-quarter earnings decline

Wall Street is expecting a year-over-year decline in earnings on higher revenue when Inspire Medical Systems (INSP) reports results for the quarter ended September 2019. While this widely known consensus forecast is important for assessing the company’s earnings situation, a strong factor that could affect its stock price in the near term is how well actual results stack up to those estimates.

The stock could rise if these key numbers beat expectations in the upcoming earnings report, due November 5. On the other hand, if they fall short of expectations, the stock could fall.

While management’s discussion of operating conditions during the earnings conference call will have the greatest impact on the durability of the immediate price change and future earnings expectations, it is worth having insight into the likelihood of an upside earnings per share surprise.

Zacks Consensus Estimate

The maker of devices for the treatment of obstructive sleep apnea is expected to report quarterly loss of $0.43 per share in its upcoming report, which would represent a year-over-year change of -95.5%.

Revenue is expected to be $19.15 million, up 46.7% from the same quarter last year.

Estimate revision trend

The consensus EPS estimate for the quarter remained unchanged over the past 30 days. This is essentially a reflection of how the analysts covering the aggregate have reassessed their initial estimates during that period.

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

Price, Consensus and EPS Surprise

Whispers about earnings

Estimate revisions ahead of a company’s earnings release provide an indication of business conditions in the period in which the earnings are released. This knowledge is the basis for our proprietary Zacks Earnings ESP (Expected Surprise Prediction) surprise prediction model.

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ESP compares the Most Accurate Estimate to the Zacks Consensus Estimate for the quarter; the Most Accurate Estimate is a newer version of the Zacks Consensus EPS.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

So a positive or negative Earnings ESP reading theoretically indicates a likely deviation of actual earnings from consensus estimates. However, the model’s predictive power 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.

It’s important to remember that a negative Earnings ESP reading does not indicate an earnings miss. Our research shows that it’s difficult to predict an earnings beat with any degree of confidence for stocks with negative Earnings ESP readings and/or Zacks Rank 4 (Sell) or 5 (Strong Sell).

What are the numbers for Inspire?

In the case of Inspire, the Most Accurate Estimate is the same as the Zacks Consensus Estimate, suggesting there are no recent analyst views that differ from those considered in deriving the consensus estimate. This leads to an Earnings ESP of 0%.

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

The combination of these factors makes it difficult to clearly predict that Inspire will beat consensus earnings per share estimates.

Are the financial results surprising? Does history matter?

Analysts often consider how well a company has been able to match consensus estimates in the past when calculating their future earnings estimates, so it’s worth looking at the company’s surprise history to assess its impact on the upcoming numbers.

For the last reported quarter, it was expected that Inspire would post a loss of $0.45 per share when in fact it produced a loss of $0.32, delivering a surprise of +28.89%.

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

Summary

Beating or missing earnings may not be the only reason a stock goes up or down. Many stocks lose ground despite beating earnings because of other factors that disappoint investors. Similarly, unforeseen catalysts help many stocks gain despite missing earnings.

That said, betting on stocks that are expected to beat earnings expectations increases the odds of success. That’s why it’s worth checking a company’s Earnings ESP and Zacks Rank ahead of its quarterly earnings release. Be sure to use our Earnings ESP Filter to discover the best stocks to buy or sell before they release.

Inspire doesn’t seem like a compelling candidate for an outperformance. However, investors should look at other factors when betting on this stock or staying away from it ahead of its earnings release.

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