The latest analyst coverage could presage a bad day for Burford Capital Limited (LON:BUR), 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. Bidders are definitely seeing a different story, with the stock price of US$4.20 reflecting a 35% rise 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 consensus from five analysts covering Burford Capital is for revenues of US$393m in 2019, implying a substantial 23% decline in sales compared to the last 12 months. Statutory earnings per share are supposed to plummet 37% to US$1.10 in the same period. Before this latest update, the analysts had been forecasting revenues of US$445m and earnings per share (EPS) of US$1.36 in 2019. Indeed, we can see that the analysts are a lot more bearish about Burford Capital's prospects, administering a substantial drop in revenue estimates and slashing their EPS estimates to boot.
The consensus price target fell 16% to US$17.76, with the weaker earnings outlook clearly leading analyst valuation estimates. 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 Burford Capital analyst has a price target of US$34.26 per share, while the most pessimistic values it at US$7.36. 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. As a result it might not be possible to derive much meaning from the consensus price target, which is after all just an average of this wide range of estimates.
Of course, another way to look at these forecasts is to place them into context against the industry itself. We would highlight that sales are expected to reverse, with the forecast 23% revenue decline a notable change from historical growth of 41% 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 3.0% annually for the foreseeable future. So although its revenues are forecast to shrink, this cloud does not come with a silver lining - Burford Capital is expected to lag the wider industry.
The Bottom Line
The most important thing to take away is that analysts cut their earnings per share estimates, expecting a clear decline in business conditions. Regrettably, they also downgraded their revenue estimates, and the latest forecasts imply the business will grow sales 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.
There might be good reason for analyst bearishness towards Burford Capital, like dilutive stock issuance over the past year. For more information, you can click here to discover this and the 2 other warning signs 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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