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The analysts covering Diamondback Energy, Inc. (NASDAQ:FANG) delivered a dose of negativity to shareholders today, by making a substantial revision to their statutory forecasts for this 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. Shares are up 8.6% to US$26.25 in the past week. It will be interesting to see if this downgrade motivates investors to start selling their holdings.
Following the latest downgrade, the 20 analysts covering Diamondback Energy provided consensus estimates of US$3.3b revenue in 2020, which would reflect an uneasy 13% decline on its sales over the past 12 months. Per-share earnings are expected to jump 61% to US$2.36. Previously, the analysts had been modelling revenues of US$3.8b and earnings per share (EPS) of US$4.11 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 22% to US$56.83, 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. Currently, the most bullish analyst values Diamondback Energy at US$132 per share, while the most bearish prices it at US$13.00. With such a wide range in price targets, the analysts are almost certainly betting on widely diverse outcomes for the underlying business. With this in mind, we wouldn't rely too heavily on the consensus price target, as it is just an average and analysts clearly have some deeply divergent views on the business.
One way to get more context on these forecasts is to look at how they compare to both past performance, and how other companies in the same industry are performing. These estimates imply that sales are expected to slow, with a forecast revenue decline of 13%, a significant reduction from annual growth of 47% over the last five years. By contrast, our data suggests that other companies (with analyst coverage) in the industry are forecast to see their revenue decline 0.4% annually for the foreseeable future. So it's pretty clear that Diamondback Energy's revenues are expected to shrink faster than 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 Diamondback Energy. Unfortunately they also downgraded their revenue estimates, and our aggregation of analyst estimates suggests that Diamondback Energy revenue is expected to perform worse 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.
That said, the analysts might have good reason to be negative on Diamondback Energy, given major dilution from new stock issuance in the past year. Learn more, and discover the 4 other concerns we've identified, for free on our platform here.
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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