The analysts covering Farmer Bros. Co. (NASDAQ:FARM) delivered a dose of negativity to shareholders today, by making a substantial revision to their statutory forecasts for next year. There was a fairly draconian cut to their revenue estimates, perhaps an implicit admission that previous forecasts were much too optimistic.
Following the downgrade, the consensus from twin analysts covering Farmer Bros is for revenues of US$494m in 2021, implying a chunky 12% decline in sales compared to the last 12 months. The loss per share is anticipated to greatly reduce in the near future, narrowing 89% to US$0.23. Yet prior to the latest estimates, the analysts had been forecasting revenues of US$582m and losses of US$0.21 per share in 2021. So there's been quite a change-up of views after the recent consensus updates, with the analysts making a serious cut to their revenue forecasts while also expecting losses per share to increase.
The consensus price target fell 19% to US$8.50, implicitly signalling that lower earnings per share are a leading indicator for Farmer Bros' valuation. 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. There are some variant perceptions on Farmer Bros, with the most bullish analyst valuing it at US$9.00 and the most bearish at US$8.00 per share. 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 Farmer Bros is an easy business to forecast or that the underlying assumptions are knowable.
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 12% revenue decline a notable change from historical growth of 2.4% over the last five years. By contrast, our data suggests that other companies (with analyst coverage) in the same industry are forecast to see their revenue grow 2.3% annually for the foreseeable future. So although its revenues are forecast to shrink, this cloud does not come with a silver lining - Farmer Bros is expected to lag the wider industry.
The Bottom Line
The most important thing to take away is that analysts increased their loss per share estimates for next year. Unfortunately analysts also downgraded their revenue estimates, and industry data suggests that Farmer Bros' revenues are expected to grow slower than the wider market. Furthermore, there was a cut to the price target, suggesting that the latest news has led to more pessimism about the intrinsic value of the business. Overall, given the drastic downgrade to next year's forecasts, we'd be feeling a little more wary of Farmer Bros going forwards.
A high debt burden combined with a downgrade of this magnitude always gives us some reason for concern, especially if these forecasts are just the first sign of a business downturn. You can learn more about our debt analysis for free on our platform here.
Another thing to consider is whether management and directors have been buying or selling stock recently. We provide an overview of all open market stock trades for the last twelve months on our platform, here.
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