The analysts covering G8 Education Limited (ASX:GEM) delivered a dose of negativity to shareholders today, by making a substantial revision to their statutory forecasts for this year. Both revenue and earnings per share (EPS) estimates were cut sharply as analysts factored in the latest outlook for the business, concluding that they were too optimistic previously. Shares are up 5.2% to AU$0.81 in the past week. It will be interesting to see if this downgrade motivates investors to start selling their holdings.
Following the latest downgrade, the current consensus, from the eleven analysts covering G8 Education, is for revenues of AU$631m in 2020, which would reflect a disturbing 31% reduction in G8 Education's sales over the past 12 months. Following this this downgrade, earnings are now expected to tip over into loss-making territory, with the analysts forecasting losses of AU$0.012 per share in 2020. Previously, the analysts had been modelling revenues of AU$775m and earnings per share (EPS) of AU$0.064 in 2020. So we can see that the consensus has become notably more bearish on G8 Education's outlook with these numbers, making a measurable cut to this year's revenue estimates. Furthermore, they expect the business to be loss-making this year, compared to their previous forecasts of a profit.
The consensus price target fell 9.7% to AU$1.49, implicitly signalling that lower earnings per share are a leading indicator for G8 Education's valuation. Fixating on a single price target can be unwise though, since the consensus target is effectively the average of analyst price targets. As a result, some investors like to look at the range of estimates to see if there are any diverging opinions on the company's valuation. Currently, the most bullish analyst values G8 Education at AU$2.33 per share, while the most bearish prices it at AU$0.78. 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.
Of course, another way to look at these forecasts is to place them into context against the industry itself. These estimates imply that sales are expected to slow, with a forecast revenue decline of 31%, a significant reduction from annual growth of 9.4% 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 13% annually for the foreseeable future. So although its revenues are forecast to shrink, this cloud does not come with a silver lining - G8 Education is expected to lag the wider industry.
The Bottom Line
The biggest low-light for us was that the forecasts for G8 Education dropped from profits to a loss this year. Unfortunately analysts also downgraded their revenue estimates, and industry data suggests that G8 Education's revenues are expected to grow slower than the wider market. Given the scope of the downgrades, it would not be a surprise to see the market become more wary of the business.
Even so, the longer term trajectory of the business is much more important for the value creation of shareholders. At Simply Wall St, we have a full range of analyst estimates for G8 Education going out to 2022, 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.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.