Why Red Hat Will Keep Going Higher

| About: Red Hat, (RHT)

Red Hat (NYSE:RHT) is set to report FQ4 2014 earnings after the market closes on Thursday, March 27. Red Hat is a multinational open-source software company which sells enterprise products. Red Hat is often associated with its Red Hat Enterprise Linux operating system. Last quarter Red Hat posted a much stronger than expected quarter beating the Estimize consensus on EPS and revenue by 6 cents and $11 million respectively. The company's revenue has been growing very steadily over the past two years and this quarter investors have set the bar above Wall Street's expectations.

The information below is derived from data submitted to the Estimize.com platform by a set of Buy Side and Independent analyst contributors.

(Click Here to see Estimates and Interactive Features for Red Hat)

The current Wall Street consensus expectation is for Red Hat to report 37 cents EPS and $398.69M revenue while the current Estimize.com consensus from 20 Buy Side and Independent contributing analysts is 39 cents EPS and $400.38M in revenue. This quarter the buy-side as represented by the Estimize.com community is expecting Red Hat to beat the Wall Street consensus on EPS and revenue by 2 cents and roughly $2 million, respectively.

Over the previous 6 quarters the consensus from Estimize.com has been more accurate than Wall Street in forecasting Red Hat's EPS and revenue 4 times each. By tapping into a wider range of contributors including hedge-fund analysts, asset managers, independent research shops, students and non professional investors Estimize has created a data set that is more accurate than Wall Street up to 69.5% of the time, but more importantly it does a better job of representing the market's actual expectations.

The magnitude of the difference between the Wall Street and Estimize consensus numbers often identifies opportunities to take advantage of expectations that may not have been priced into the market. In this case we are seeing a larger gap in expectations than usual.

The distribution of estimates published by analysts on the Estimize.com platform range from 35 cents to 44 cents EPS and from $395.65M to $405.50M in revenues. This quarter we're seeing a wide distribution of estimates on Red Hat.

The size of the distribution of estimates relative to previous quarters often signals whether or not the market is confident that it has priced in the expected earnings already. A wider distribution of estimates signaling less agreement in the market could mean greater volatility post earnings.

Over the past 4 months the Wall Street EPS consensus increased from 36 cents to 37 cents while the Estimize consensus rose from 38 cents to 39 cents. Meanwhile the Wall Street revenue forecast pushed higher from $394.39M to $398.69M while the Estimize forecast increased slightly from a low of $399.35M to $400.38M. Timeliness is correlated with accuracy and upward analyst revisions at the end of the quarter are often a bullish indicator.

The analyst with the highest estimate confidence rating this quarter is Nils1975 who projects 40 cents EPS and $401.69M in revenue. In the Winter 2014 season Nils1975 is rated as the 15th best analyst and is ranked 12th overall among over 4,000 contributing analysts. This season Nils1975 has been more accurate than Wall Street in forecasting EPS and revenue an impressive 65% and 70% of the time respectively throughout 94 estimates. Estimate confidence ratings are calculated through algorithms developed by deep quantitative research which looks at correlations between analyst track records and tendencies as they relate to future accuracy. In this case Nils1975 is making a bullish call expecting Red Hat to beat the Estimize community's expectations on both the top and bottom line.

Red Hat's revenue has grown in each of the past five quarters and this time around contributing analysts on the Estimize.com platform are expecting more of the same. The Estimize community is expecting Red Hat to grow its EPS and revenue on a year over year basis by 8% and 15% respectively and beat the Street's expectations by a small margin on both the top and bottom line.

Disclosure: None.