There's been a notable change in appetite for Diversified Royalty Corp. (TSE:DIV) shares in the week since its first-quarter report, with the stock down 11% to CA$1.59. Revenues missed expectations, with sales of CA$7.3m falling 13% short of forecasts. Earnings correspondingly dipped, with Diversified Royalty reporting a statutory loss of CA$0.10 per share, where the analysts were expecting a profit. This is an important time for investors, as they can track a company's performance in its report, look at what experts are forecasting for next year, and see if there has been any change to expectations for the business. With this in mind, we've gathered the latest statutory forecasts to see what the analysts are expecting for next year.
After the latest results, the six analysts covering Diversified Royalty are now predicting revenues of CA$32.8m in 2020. If met, this would reflect a credible 4.9% improvement in sales compared to the last 12 months. Diversified Royalty is also expected to turn profitable, with statutory earnings of CA$0.14 per share. Yet prior to the latest earnings, the analysts had been anticipated revenues of CA$33.0m and earnings per share (EPS) of CA$0.14 in 2020. So it looks like there's been a small decline in overall sentiment after the recent results - there's been no major change to revenue estimates, but the analysts did make a small dip in their earnings per share forecasts.
It might be a surprise to learn that the consensus price target fell 6.2% to CA$3.25, with the analysts clearly linking lower forecast earnings to the performance of the stock price. 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 Diversified Royalty analyst has a price target of CA$4.50 per share, while the most pessimistic values it at CA$2.25. Note the wide gap in analyst price targets? This implies to us that there is a fairly broad range of possible scenarios for the underlying 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. It's pretty clear that there is an expectation that Diversified Royalty's revenue growth will slow down substantially, with revenues next year expected to grow 4.9%, compared to a historical growth rate of 13% over the past five years. Juxtapose this against the other companies in the industry with analyst coverage, which are forecast to grow their revenues (in aggregate) 3.4% next year. Even after the forecast slowdown in growth, it seems obvious that Diversified Royalty is also expected to grow faster than the wider industry.
The Bottom Line
The biggest concern is that the analysts reduced their earnings per share estimates, suggesting business headwinds could lay ahead for Diversified Royalty. Happily, there were no major changes to revenue forecasts, with the business still expected to grow faster than the wider industry. The consensus price target fell measurably, with the analysts seemingly not reassured by the latest results, leading to a lower estimate of Diversified Royalty's future valuation.
With that in mind, we wouldn't be too quick to come to a conclusion on Diversified Royalty. Long-term earnings power is much more important than next year's profits. We have forecasts for Diversified Royalty going out to 2024, and you can see them free on our platform here.
Even so, be aware that Diversified Royalty is showing 4 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...
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