Market forces rained on the parade of Lundin Energy AB (STO:LUNE) shareholders today, when the analysts downgraded their forecasts for this year. Revenue and earnings per share (EPS) forecasts were both revised downwards, with the analysts seeing grey clouds on the horizon. At US$241, shares are up 6.4% in the past 7 days. It will be interesting to see if this downgrade motivates investors to start selling their holdings.
After the downgrade, the consensus from Lundin Energy's 21 analysts is for revenues of US$2.1b in 2020, which would reflect a definite 14% decline in sales compared to the last year of performance. After this downgrade, the company is anticipated to report a loss of US$0.56 in 2020, a sharp decline from a profit over the last year. Prior to this update, the analysts had been forecasting revenues of US$2.6b and earnings per share (EPS) of US$0.87 in 2020. So we can see that the consensus has become notably more bearish on Lundin Energy's outlook with these numbers, making a pretty serious reduction 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 was broadly unchanged at US$25.49, perhaps implicitly signalling that the weaker earnings outlook is not expected to have a long-term impact on the 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. There are some variant perceptions on Lundin Energy, with the most bullish analyst valuing it at US$37.55 and the most bearish at US$13.30 per share. This is a fairly broad spread of estimates, suggesting that the analysts are forecasting a wide range of possible outcomes for the business.
These estimates are interesting, but it can be useful to paint some more broad strokes when seeing how forecasts compare, both to the Lundin Energy's past performance and to peers in the same industry. These estimates imply that sales are expected to slow, with a forecast revenue decline of 14%, a significant reduction from annual growth of 30% 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 7.1% annually for the foreseeable future. It's pretty clear that Lundin Energy's revenues are expected to perform substantially worse than the wider industry.
The Bottom Line
The biggest low-light for us was that the forecasts for Lundin Energy dropped from profits to a loss this year. Regrettably, they also downgraded their revenue estimates, and the latest forecasts imply the business will grow sales slower than the wider market. We're also surprised to see that the price target went unchanged. Still, deteriorating business conditions (assuming accurate forecasts!) can be a leading indicator for the stock price, so we wouldn't blame investors for being more cautious on Lundin Energy after the downgrade.
Worse, Lundin Energy is labouring under a substantial debt burden, which - if today's forecasts prove accurate - the forecast downgrade could potentially exacerbate. To see more of our financial analysis, you can click through to our free platform to learn more about its balance sheet and specific concerns we've identified.
Another thing to consider is whether management and directors have been buying or selling stock recently. We provide an overview of all open market stock trades for the last twelve months on our platform, here.
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