The latest analyst coverage could presage a bad day for Fairfax Financial Holdings Limited (TSE:FFH), with the analysts making across-the-board cuts to their statutory estimates that might leave shareholders a little shell-shocked. Both revenue and earnings per share (EPS) forecasts went under the knife, suggesting analysts have soured majorly on the business.
After the downgrade, the consensus from Fairfax Financial Holdings' five analysts is for revenues of US$19b in 2020, which would reflect an uneasy 12% decline in sales compared to the last year of performance. After this downgrade, the company is anticipated to report a loss of US$5.43 in 2020, a sharp decline from a profit over the last year. Previously, the analysts had been modelling revenues of US$21b and earnings per share (EPS) of US$37.99 in 2020. So we can see that the consensus has become notably more bearish on Fairfax Financial Holdings' 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 18% to US$423, implicitly signalling that lower earnings per share are a leading indicator for Fairfax Financial Holdings' valuation. That's not the only conclusion we can draw from this data however, as some investors also like to consider the spread in estimates when evaluating analyst price targets. The most optimistic Fairfax Financial Holdings analyst has a price target of US$577 per share, while the most pessimistic values it at US$321. This is a fairly broad spread of estimates, suggesting that the analysts are forecasting a wide range of possible outcomes for the business.
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. We would highlight that sales are expected to reverse, with the forecast 12% revenue decline a notable change from historical growth of 20% 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 1.5% annually for the foreseeable future. So although its revenues are forecast to shrink, this cloud does not come with a silver lining - Fairfax Financial Holdings is expected to lag the wider industry.
The Bottom Line
The biggest low-light for us was that the forecasts for Fairfax Financial Holdings dropped from profits to a loss this year. Unfortunately analysts also downgraded their revenue estimates, and industry data suggests that Fairfax Financial Holdings' revenues are expected to grow slower than the wider market. With a serious cut to this year's expectations and a falling price target, we wouldn't be surprised if investors were becoming wary of Fairfax Financial Holdings.
So things certainly aren't looking great, and you should also know that we've spotted some potential warning signs with Fairfax Financial Holdings, including recent substantial insider selling. For more information, you can click here to discover this and the 2 other risks we've identified.
Of course, seeing company management invest large sums of money in a stock can be just as useful as knowing whether analysts are downgrading their estimates. So you may also wish to search this free list of stocks that insiders are buying.
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