One thing we could say about the analysts on SomnoMed Limited (ASX:SOM) - they aren't optimistic, having just made a major negative revision to their near-term (statutory) forecasts for the organization. Revenue and earnings per share (EPS) forecasts were both revised downwards, with analysts seeing grey clouds on the horizon.
Following the latest downgrade, the three analysts covering SomnoMed provided consensus estimates of AU$60m revenue in 2020, which would reflect a measurable 4.6% decline on its sales over the past 12 months. Statutory earnings per share are supposed to shrink 8.8% to AU$0.013 in the same period. Previously, the analysts had been modelling revenues of AU$68m and earnings per share (EPS) of AU$0.059 in 2020. It looks like analyst sentiment has declined substantially, with a measurable cut to revenue estimates and a large cut to earnings per share numbers as well.
The consensus price target fell 32% to AU$2.54, with the weaker earnings outlook clearly leading analyst valuation estimates. 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. The most optimistic SomnoMed analyst has a price target of AU$3.76 per share, while the most pessimistic values it at AU$1.33. 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 SomnoMed'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 4.6%, a significant reduction from annual growth of 12% 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 15% annually for the foreseeable future. So although its revenues are forecast to shrink, this cloud does not come with a silver lining - SomnoMed 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 SomnoMed. Regrettably, they also downgraded their revenue estimates, and the latest forecasts imply the business will grow sales slower than the wider market. After such a stark change in sentiment from analysts, we'd understand if readers now felt a bit wary of SomnoMed.
After a downgrade like this, it's pretty clear that previous forecasts were too optimistic. What's more, we've spotted several possible issues with SomnoMed's business, like concerns around earnings quality. For more information, you can click here to discover this and the 3 other concerns 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.
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.
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