Today is shaping up negative for Aaron's, Inc. (NYSE:AAN) shareholders, with the analysts delivering a substantial negative revision to this year's forecasts. Both revenue and earnings per share (EPS) estimates were cut sharply as the analysts factored in the latest outlook for the business, concluding that they were too optimistic previously. Investors however, have been notably more optimistic about Aaron's recently, with the stock price up a notable 19% to US$30.51 in the past week. Whether the downgrade will have a negative impact on demand for shares is yet to be seen.
Following the latest downgrade, the seven analysts covering Aaron's provided consensus estimates of US$3.5b revenue in 2020, which would reflect a definite 11% decline on its sales over the past 12 months. Statutory earnings per share are presumed to shoot up 338% to US$2.05. Prior to this update, the analysts had been forecasting revenues of US$3.9b and earnings per share (EPS) of US$2.85 in 2020. Indeed, we can see that the analysts are a lot more bearish about Aaron's' prospects, administering a measurable cut to revenue estimates and slashing their EPS estimates to boot.
The average price target climbed 9.5% to US$37.90 despite the reduced earnings forecasts, suggesting that this earnings impact could be a positive for the stock, once it passes. The consensus price target is just an average of individual analyst targets, so - it could be handy to see how wide the range of underlying estimates is. There are some variant perceptions on Aaron's, with the most bullish analyst valuing it at US$66.00 and the most bearish at US$25.00 per share. We would probably assign less value to the forecasts in this situation, because such a wide range of estimates could imply that the future of this business is difficult to value accurately. With this in mind, we wouldn't rely too heavily on the consensus price target, as it is just an average and analysts clearly have some deeply divergent views on the business.
Another way we can view these estimates is in the context of the bigger picture, such as how the forecasts stack up against past performance, and whether forecasts are more or less bullish relative to other companies in the industry. We would highlight that sales are expected to reverse, with the forecast 11% revenue decline a notable change from historical growth of 6.6% over the last five years. By contrast, our data suggests that other companies (with analyst coverage) in the same industry are forecast to see their revenue grow 3.9% annually for the foreseeable future. So although its revenues are forecast to shrink, this cloud does not come with a silver lining - Aaron's is expected to lag the wider industry.
The Bottom Line
The biggest issue in the new estimates is that analysts have reduced their earnings per share estimates, suggesting business headwinds lay ahead for Aaron's. Regrettably, they also downgraded their revenue estimates, and the latest forecasts imply the business will grow sales slower than the wider market. The increasing price target is not intuitively what we would expect to see, given these downgrades, and we'd suggest shareholders revisit their investment thesis before making a decision.
With that said, the long-term trajectory of the company's earnings is a lot more important than next year. We have estimates - from multiple Aaron's analysts - going out to 2024, and you can see them free on our platform here.
Another way to search for interesting companies that could be reaching an inflection point is to track whether management are buying or selling, with our free list of growing companies that insiders are buying.
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