Alliance Fiber's (AFOP) Q4 Earnings: What's in Store?

Alliance Fiber Optic Products Inc. AFOP is set to report fourth-quarter 2015 results after the closing bell on Feb 18. Last quarter, the company had delivered a negative surprise of 44.4%. For the trailing four quarters, the stock posted an average negative surprise of 12.0%.

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

Factors to Consider

Alliance Fiber's financial performance in the fourth quarter will likely benefit from surging "data bandwidth demand" led by increased conversion to fiber technology from copper in data center applications. After dismal third-quarter 2015 results, the company is optimistic about a rebound in the fourth quarter, primarily backed by resumption of demand from key customers and overall bullish sentiment in the datacom markets.

Moreover, Alliance Fiber's optical communications and access business has been seeing impressive growth that is expected to supplement its fourth-quarter financials. Of late, increasing capital expenditure in the datacenter markets is driving ample commercial opportunities for fiber optic infrastructure providers; and Alliance Fiber believes that it is well equipped to leverage this trend.

In addition, the company projects new business and product activities to be accretive to its fourth-quarter performance. In this regard, increasing use of next-generation transceivers, using higher-speed Silicon Photonics technology, has unlocked multiple opportunities for Alliance Fiber. The company expects steady customer engagement in this market to act as a growth driver for fourth-quarter 2015.

However, on the flip side, seasonal fluctuations in demand can prove to be upsetting for Alliance Fiber's top-line performance. The company is also highly exposed to concentration risks. In addition, the company experienced a difficult third quarter due to unfavorable inventory management and order cutbacks on part of its Web 2.0 customers, and this trend might hurt its fourth-quarter results as well.

Further, softness in the global economy, spearheaded by slowdown in China, volatility in energy costs and unfavorable currency movements, may weigh on Alliance Fiber's performance in the fourth quarter. At the same time, increasing consolidation in the Internet and communications industry has aggravated volatility in demand for fiber optic products, adding to the company's woes.

Earnings Whispers

Our proven model does not conclusively show that Alliance Fiber will beat earnings this season. 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. This is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is currently pegged at 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 23 cents.

Zacks Rank: Alliance Fiber's Zacks Rank #3, when combined with 0.00% Earnings ESP, makes surprise prediction difficult. Note that stocks with a Zacks Rank #1, 2 or 3 have a significantly higher chance of beating earnings.

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

Stocks to Consider

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

American Capital, Ltd. ACAS with an Earnings ESP of +12.50% and a Zacks Rank #2.

Beacon Roofing Supply, Inc. BECN with an Earnings ESP of +8.33% and a Zacks Rank #2.

Magellan Health, Inc. MGLN with an Earnings ESP of +5.56% and a Zacks Rank #1.

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