Today is shaping up negative for Servcorp Limited (ASX:SRV) shareholders, with the covering analyst delivering a substantial negative revision to this year's forecasts. Both revenue and earnings per share (EPS) estimates were cut sharply as the analyst factored in the latest outlook for the business, concluding that they were too optimistic previously.
Following the latest downgrade, the lone analyst covering Servcorp provided consensus estimates of AU$318m revenue in 2020, which would reflect a chunky 8.9% decline on its sales over the past 12 months. Statutory earnings per share are anticipated to nosedive 42% to AU$0.20 in the same period. Before this latest update, the analyst had been forecasting revenues of AU$362m and earnings per share (EPS) of AU$0.33 in 2020. It looks like analyst sentiment has declined substantially, with a substantial drop in revenue estimates and a pretty serious decline to earnings per share numbers as well.
The consensus price target fell 25% to AU$3.80, with the weaker earnings outlook clearly leading analyst valuation 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 8.9% revenue decline a notable change from historical growth of 4.4% 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 5.4% next year. It's pretty clear that Servcorp's revenues are expected to perform substantially worse than the wider industry.
The Bottom Line
The biggest issue in the new estimates is that the analyst has reduced their earnings per share estimates, suggesting business headwinds lay ahead for Servcorp. Unfortunately the analyst also downgraded their revenue estimates, and industry data suggests that Servcorp's 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 Servcorp.
Still, the long-term prospects of the business are much more relevant than next year's earnings. At least one analyst has provided forecasts out to 2022, which can be seen for 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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