Will Yahoo (YHOO) Disappoint Q3 Earnings Estimates? - Analyst Blog

Yahoo Inc. (YHOO) is set to report the third-quarter 2014 results on Oct 21. Last quarter, it posted in-line results. It is worth noting that Yahoo has outperformed the Zacks Consensus Estimate in three out of the four preceding quarters with a positive earnings surprise average of 12.38%.

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

Factors at Play this Past Quarter

Yahoo's second-quarter earnings were in line with the Zacks Consensus Estimate. However, the top line decreased 4.3% sequentially and 4.5% year over year.

Margins contracted both sequentially as well as from the year-ago quarter due to higher-than-expected expenses and an unfavorable mix.

The Alibaba investment has fetched considerable returns to Yahoo at a very difficult time, giving CEO Mayer a sizeable amount of cash to pursue strategic alternatives. CEO Mayer is making smaller acquisitions to bring fresh talent and technology on board.

Lately, Yahoo has been focusing on content and mobile. The company is seeking means for greater efficiency, collaboration and innovation across its business. In this regard, Yahoo trimmed 3% of its global workforce to concentrate more on growth areas with an optimized cost structure. Yahoo's restructuring efforts could help CEO Mayer in bringing about a positive change and help boost margins and earnings growth, going forward.

For the third quarter, Yahoo expects revenues on an ex-TAC basis within $1.02–$1.06 billion, adjusted EBITDA in the range of $220–$260 million and non-GAAP operating income in the $70–$110 million range.

Earnings Whispers?

Our proven model does not conclusively show that Yahoo will beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: The Most Accurate estimate stands at 17 cents while the Zacks Consensus Estimate is higher at 20 cents. That is a difference of -15.00%.

Zacks Rank: Yahoo's Zacks Rank #3 (Hold) increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

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

Other Stocks to Consider

You could consider other stocks with a positive Earnings ESP and a favorable Zacks Rank such as:

The New York Times Company (NYT), with an Earnings ESP of +100.0% and a Zacks Rank #1 (Strong Buy).

United Insurance Holdings Corp (UIHC), with an Earnings ESP of +2.70% and a Zacks Rank #1.

Tallgrass Energy Partners, LP (TEP), with an Earnings ESP of +6.67% and a Zacks Rank #1.

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