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Red 5 Limited Reported A Surprise Loss, And Analysts Have Updated Their Forecasts

Simply Wall St

One of the biggest stories of last week was how Red 5 Limited (ASX:RED) shares plunged 33% in the week since its latest half-yearly results, closing yesterday at AU$0.22. Things were not great overall, with a surprise (statutory) loss of AU$0.0026 per share on revenues of AU$105m, even though analysts had been expecting a profit. Following the result, analysts have updated their earnings model, and it would be good to know whether they think there's been a strong change in the company's prospects, or if it's business as usual. We thought readers would find it interesting to see analysts' latest (statutory) post-earnings forecasts for next year.

Check out our latest analysis for Red 5

ASX:RED Past and Future Earnings, March 15th 2020

Taking into account the latest results, the most recent consensus for Red 5 from three analysts is for revenues of AU$228.3m in 2020, which is a major 21% increase on its sales over the past 12 months. Statutory earnings per share are expected to surge 1289% to AU$0.016. In the lead-up to this report, analysts had been modelling revenues of AU$237.3m and earnings per share (EPS) of AU$0.027 in 2020. From this we can that analyst sentiment has definitely become more bearish after the latest results, leading to lower revenue forecasts and a large cut to earnings per share estimates.

Analysts made no major changes to their price target of AU$0.49, suggesting the downgrades are not expected to have a long-term impact on Red 5's valuation. It could also be instructive to look at the range of analyst estimates, to evaluate how different the outlier opinions are from the mean. There are some variant perceptions on Red 5, with the most bullish analyst valuing it at AU$0.50 and the most bearish at AU$0.46 per share. The narrow spread of estimates could suggest that the business' future is relatively easy to value, or that analysts have a clear view on its prospects.

Another way to assess these estimates is by comparing them to past performance, and seeing whether analysts are more or less bullish relative to other companies in the market. It's pretty clear that analysts expect Red 5's revenue growth will slow down substantially, with revenues next year expected to grow 21%, compared to a historical growth rate of 29% over the past five years. By way of comparison, other companies in this market with analyst coverage, are forecast to grow their revenue at 1.0% next year. Even after the forecast slowdown in growth, it seems obvious that analysts still thinkRed 5 will grow faster than the wider market.

The Bottom Line

The biggest concern with the new estimates is that analysts have reduced their earnings per share estimates, suggesting business headwinds could lay ahead for Red 5. Regrettably, they also downgraded their revenue estimates, but the latest forecasts still imply the business will grow faster than the wider market. The consensus price target held steady at AU$0.49, with the latest estimates not enough to have an impact on analysts' estimated valuations.

With that in mind, we wouldn't be too quick to come to a conclusion on Red 5. Long-term earnings power is much more important than next year's profits. We have forecasts for Red 5 going out to 2023, and you can see them 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.