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The latest analyst coverage could presage a bad day for Headwater Exploration Inc. (TSE:HWX), with the analysts making across-the-board cuts to their statutory estimates that might leave shareholders a little shell-shocked. Revenue estimates were cut sharply as analysts signalled a weaker outlook - perhaps a sign that investors should temper their expectations as well. Investors however, have been notably more optimistic about Headwater Exploration recently, with the stock price up a remarkable 20% to CA$4.66 in the past week. It will be interesting to see if the downgrade has an impact on buying demand for the company's shares.
Following the downgrade, the current consensus from Headwater Exploration's three analysts is for revenues of CA$101m in 2021 which - if met - would reflect a huge increase on its sales over the past 12 months. Prior to the latest estimates, the analysts were forecasting revenues of CA$102m in 2021. Overall it looks like Headwater Exploration is performing in line with analyst expectations, given the analysts have updated their numbers and there's been no real change to this year's forecast following these updates.
Additionally, the consensus price target for Headwater Exploration increased 32% to CA$5.00, showing a clear increase in optimism from the analysts involved. There's another way to think about price targets though, and that's to look at the range of price targets put forward by analysts, because a wide range of estimates could suggest a diverse view on possible outcomes for the business. The most optimistic Headwater Exploration analyst has a price target of CA$5.50 per share, while the most pessimistic values it at CA$3.25. There are definitely some different views on the stock, but the range of estimates is not wide enough as to imply that the situation is unforecastable, in our view.
Looking at the bigger picture now, one of the ways we can make sense of these forecasts is to see how they measure up against both past performance and industry growth estimates. For example, we noticed that Headwater Exploration's rate of growth is expected to accelerate meaningfully, with revenues forecast to exhibit 7x growth to the end of 2021 on an annualised basis. That is well above its historical decline of 9.7% a year over the past five years. By contrast, our data suggests that other companies (with analyst coverage) in the industry are forecast to see their revenue grow 11% per year. Not only are Headwater Exploration's revenues expected to improve, it seems that the analysts are also expecting it to grow faster than the wider industry.
The Bottom Line
The clear take away from these updates is that analysts made no change to their revenue estimates for this year, with the business apparently performing in line with their models. The analysts also expect revenues to grow faster than the wider market. There was also a nice increase in the price target, with analysts apparently feeling that the intrinsic value of the business is improving. Overall, given the drastic downgrade to this year's forecasts, we'd be feeling a little more wary of Headwater Exploration going forwards.
There might be good reason for analyst bearishness towards Headwater Exploration, like recent substantial insider selling. For more information, you can click here to discover this and the 3 other warning signs we've identified.
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.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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