Market forces rained on the parade of Houlihan Lokey, Inc. (NYSE:HLI) shareholders today, when the analysts downgraded their forecasts for next year. Both revenue and earnings per share (EPS) estimates were cut sharply as analysts factored in the latest outlook for the business, concluding that they were too optimistic previously.
Following the downgrade, the consensus from seven analysts covering Houlihan Lokey is for revenues of US$1.1b in 2021, implying a perceptible 2.0% decline in sales compared to the last 12 months. Per-share earnings are expected to accumulate 3.4% to US$2.83. Before this latest update, the analysts had been forecasting revenues of US$1.3b and earnings per share (EPS) of US$3.30 in 2021. Indeed, we can see that the analysts are a lot more bearish about Houlihan Lokey's prospects, administering a measurable cut to revenue estimates and slashing their EPS estimates to boot.
Despite the cuts to forecast earnings, there was no real change to the US$58.33 price target, showing that the analysts don't think the changes have a meaningful impact on its intrinsic value. The consensus price target is just an average of individual analyst targets, so - it could be handy to see how wide the range of underlying estimates is. The most optimistic Houlihan Lokey analyst has a price target of US$61.00 per share, while the most pessimistic values it at US$55.00. Even so, with a relatively close grouping of analyst estimates, it looks to us as though the analysts are quite confident in their valuations, suggesting that Houlihan Lokey is an easy business to forecast or that the underlying assumptions are knowable.
Taking a look at the bigger picture now, one of the ways we can understand these forecasts is to see how they compare to both past performance and industry growth estimates. These estimates imply that sales are expected to slow, with a forecast revenue decline of 2.0%, a significant reduction from annual growth of 12% over the last five years. Compare this with our data, which suggests that other companies in the same industry are, in aggregate, expected to see their revenue grow 2.2% next year. So although its revenues are forecast to shrink, this cloud does not come with a silver lining - Houlihan Lokey 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. The lack of change in the price target is puzzling in light of the downgrade but, with a serious decline expected next year, we wouldn't be surprised if investors were a bit wary of Houlihan Lokey.
Still, the long-term prospects of the business are much more relevant than next year's earnings. We have estimates - from multiple Houlihan Lokey analysts - going out to 2022, and you can see them free on our platform here.
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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