Will Synaptics (SYNA) Disappoint Again in Q4 Earnings?

Synaptics Inc SYNA is set to report fourth-quarter fiscal 2016 results on Jul 28. Last quarter, the company posted a negative earnings surprise of 24.79%. The company has posted an average negative earnings surprise of 8.50% over the trailing four quarters.

Let’s see how things are shaping up for this quarter.

SYNAPTICS INC Price and EPS Surprise

SYNAPTICS INC Price and EPS Surprise | SYNAPTICS INC Quote

Factors to Consider

Declining iPhone sales and overall softness in the high end smartphone market are proving to be a big impediment to Synaptics’ revenue growth. Apple Inc. is one of its biggest clients along with Asian giants like Samsung, Huawei and Lenovo. Even the weakness in the PC business is wreaking havoc on Synaptics’ financial performance. In the third quarter of fiscal 2016, the company’s revenues were down nearly 16% year over year.

The company trimmed its fourth quarter outlook, given the rapid decline in demand from high end smartphone OEMs. The company expects revenues in the fourth quarter to be in the range of $300 million to $340 million, below $479 million registered in the year-ago quarter.

We believe that the sluggish macro backdrop and no near-term respite for weakness in the smartphone market are unlikely to be counterbalanced by TDDI (Touch and Display Driver Integration) and fingerprint business opportunities as these will face significant pricing pressure in 2016. Intensifying competition and ongoing troubles in the Chinese economy can prove to be a headwind for the company as it derives a significant portion of its revenues from the region.

To battle the odds, the company is streamlining its operations. It recently slashed 9% of its workforce and shut down multiple offices to “align the company’s cost structure consistent with its revenue levels.” Also, a buyout, speculations of which have been doing the rounds for some time, should be a positive for the company. Also, a strong shareholder repurchase plan will cushion the company’s earnings. Moreover, strategic acquisitions like Renesas SP Drivers, which have greatly expanded its offerings, are added positives.

Earnings Whispers

Our proven model does not conclusively show that Synaptics is likely to beat earnings this quarter. 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: Synaptics currently has an ESP of -44.44%. This is because the Most Accurate estimate stands at 5 cents while the Zacks Consensus Estimate is pegged higher at 9 cents per share.

Zacks Rank: Synaptics has a Zacks Rank #3, which increases the predictive power of ESP. However, we need to have a positive ESP to be confident of an earnings beat.

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

Stocks to Consider

Here are a few stocks that, as per our model, have the right combination of elements to post an earnings beat this quarter:

Innoviva, Inc.INVA with an Earnings ESP of +25.00% and a Zacks Rank #1.

GoDaddy Inc. GDDY with an Earnings ESP of +50.00% and a Zacks Rank #3.

Expedia Inc. EXPE with an Earnings ESP of +6.82% and a Zacks Rank #3.

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