The analysts covering Extended Stay America, Inc. (NASDAQ:STAY) 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. Bidders are definitely seeing a different story, with the stock price of US$10.00 reflecting a 12% rise in the past week. With such a sharp increase, it seems brokers may have seen something that is not yet being priced in by the wider market.
Following the downgrade, the consensus from eight analysts covering Extended Stay America is for revenues of US$946m in 2020, implying a disturbing 21% decline in sales compared to the last 12 months. After this downgrade, the company is anticipated to report a loss of US$0.47 in 2020, a sharp decline from a profit over the last year. Before this latest update, the analysts had been forecasting revenues of US$1.1b and earnings per share (EPS) of US$0.025 in 2020. There looks to have been a major change in sentiment regarding Extended Stay America's prospects, with a substantial drop in revenues and the analysts now forecasting a loss instead of a profit.
Analysts lifted their price target 9.0% to US$11.84, implicitly signalling that lower earnings per share are not expected to have a longer-term impact on the stock's value. 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 Extended Stay America analyst has a price target of US$16.00 per share, while the most pessimistic values it at US$8.00. This is a fairly broad spread of estimates, suggesting that the analysts are forecasting a wide range of possible outcomes for the business.
Another way we can view these estimates is in the context of the bigger picture, such as how the forecasts stack up against past performance, and whether forecasts are more or less bullish relative to other companies in the industry. Over the past five years, revenues have declined around 0.3% annually. Worse, forecasts are essentially predicting the decline to accelerate, with the estimate for a 21% decline in revenue next year. Compare this against analyst estimates for companies in the wider industry, which suggest that revenues (in aggregate) are expected to grow 7.0% next year. So while a broad number of companies are forecast to decline, unfortunately Extended Stay America is expected to see its sales affected worse than other companies in the industry.
The Bottom Line
The most important thing to take away is that analysts are expecting Extended Stay America to become unprofitable this year. Regrettably, they also downgraded their revenue estimates, and the latest forecasts imply the business will grow sales slower than the wider market. The increasing price target is not intuitively what we would expect to see, given these downgrades, and we'd suggest shareholders revisit their investment thesis before making a decision.
So things certainly aren't looking great, and you should also know that we've spotted some potential warning signs with Extended Stay America, including the risk of cutting its dividend. Learn more, and discover the 1 other warning sign we've identified, 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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