U.S. telecom behemoth Verizon Communications Inc. (VZ Quick QuoteVZ - Free Report) is slated to report second-quarter 2016 results, before the opening bell on Jul 26.

Last quarter, Verizon posted an earnings surprise of 0.00%. Moreover, the company’s earnings surpassed the Zacks Consensus Estimate in three out of the previous four quarters, with an average beat of 1.52%. Let’s see how things are shaping up for this announcement.

VERIZON COMM Price and EPS Surprise

VERIZON COMM Price and EPS Surprise | VERIZON COMM Quote

Factors at Play

Verizon and its wireline workers were at a stalemate over a labor contract with two of its workers unions, namely, The Communications Workers of America (CWA) and International Brotherhood of Electrical Workers (IBEW). However, the issues have been resolved and the wireline division is back in operation as the strike officially came to an end on Jun 17, 2016.  Nearly 36,500 workers of the company’s wireline and cable TV segment were on a strike since Apr 13, 2016. Under the new contract, Verizon will provide a 10.9% pay hike to its unionized workers over a period of four years, a small increment in pension benefit and a promise to create nearly 1,400 new union jobs.

Meanwhile, spectrum crunch has become a major issue for the U.S. telecom industry, which is already a saturated wireless market. If Verizon fails to acquire substantial spectrum bands in the upcoming 600 MHz low-band spectrum auction, the company’s business is likely to be hurt. Moreover, higher spending on promotions and offering of discounts may impact its EBITDA and EBITDA service margins at the wireless segment. Further, intensifying competition, access lines losses and regulatory concerns persist.

Nevertheless, Verizon is preparing for the initial deployment of the 5G wireless networks. Additionally, the company has decided to purchase Telogis Inc., a CA-based developer of cloud-based solutions, to strengthen its foothold in the connected vehicle market. Verizon is also focusing on online content delivery, mobile video and online advertising for growth. These businesses have the potential to generate significant revenues for the company, especially given that its legacy telecom business is presently facing serious pricing competition.

Earnings Whispers

Our proven model does not conclusively show that Verizon is likely to beat the Zacks Consensus Estimate 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. Unfortunately, that is not the case here as elaborated below.

Zacks ESP: Verizon has an earnings ESP of -4.21%. This is because the Most Accurate estimate stands at 91 cents while the Zacks Consensus Estimate is pegged higher at 95 cents.

Zacks Rank: Verizon has a Zacks Rank #3 (Hold) which increases the predictive power of ESP. However, the company’s negative ESP makes surprise prediction difficult.

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

Stocks to Consider

Here are some other companies to consider as our model shows that they have the right combination of elements to post an earnings beat this quarter.

Open Text Corporation (OTEX Quick QuoteOTEX - Free Report) , with an earnings ESP of +1.10% and a Zacks Rank #1.

LG Display Co. Ltd. (LPL Quick QuoteLPL - Free Report) , with an earnings ESP of +50.00% and a Zacks Rank #2.

Charter Communications Inc. (CHTR Quick QuoteCHTR - Free Report) , with an earnings ESP of +404.76% and a Zacks Rank #2.

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