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Results: TransAlta Corporation Confounded Analyst Expectations With A Surprise Profit

Simply Wall St

TransAlta Corporation (TSE:TA) shareholders are probably feeling a little disappointed, since its shares fell 4.1% to CA$7.80 in the week after its latest first-quarter results. In addition to beating expectations by 19% with revenues of CA$606m, TransAlta delivered a surprise (statutory) profit of CA$0.10 per share, a sweet improvement compared to the losses that the analysts forecast. 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. We thought readers would find it interesting to see the analysts latest (statutory) post-earnings forecasts for next year.

Check out our latest analysis for TransAlta

TSX:TA Past and Future Earnings May 14th 2020

Following the recent earnings report, the consensus from five analysts covering TransAlta is for revenues of CA$2.08b in 2020, implying a not inconsiderable 10.0% decline in sales compared to the last 12 months. Statutory earnings per share are expected to dive 70% to CA$0.15 in the same period. Yet prior to the latest earnings, the analysts had been forecasting revenues of CA$2.16b and losses of CA$0.12 per share in 2020. While we note the small dip in to the revenue outlook, the analysts are now also predicting for the business to become profitable next year - sooner than previously forecast - which looks like a pretty clear lift in expectations.

There's been no real change to the average price target of CA$10.00, with the lower revenue and higher earnings forecasts not expected to meaningfully impact the company's valuation over a longer timeframe. 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 TransAlta, with the most bullish analyst valuing it at CA$12.00 and the most bearish at CA$7.00 per share. Analysts definitely have varying views on the business, but the spread of estimates is not wide enough in our view to suggest that extreme outcomes could await TransAlta shareholders.

Taking a look at the bigger picture now, one of the ways we can understand these forecasts is to see how they compare to both past performance and industry growth estimates. Over the past five years, revenues have declined around 0.4% annually. Worse, forecasts are essentially predicting the decline to accelerate, with the estimate for a 10.0% decline in revenue next year. By contrast, our data suggests that other companies (with analyst coverage) in a similar industry are forecast to see their revenue grow 3.4% per year. So it's pretty clear that, while it does have declining revenues, the analysts also expect TransAlta to suffer worse than the wider industry.

The Bottom Line

The most important thing to take away is that the analysts now expect TransAlta to become profitable next year, compared to previous expectations that it would report a loss. Unfortunately, they also downgraded their revenue estimates, and our data indicates revenues are expected to perform worse than the wider industry. Even so, earnings per share are more important to the intrinsic value of the business. With that said, earnings are more important to the long-term value of the business. There was no real change to the consensus price target, suggesting that the intrinsic value of the business has not undergone any major changes with the latest estimates.

With that said, the long-term trajectory of the company's earnings is a lot more important than next year. We have estimates - from multiple TransAlta analysts - going out to 2024, and you can see them free on our platform here.

And what about risks? Every company has them, and we've spotted 4 warning signs for TransAlta (of which 2 don't sit too well with us!) you should know about.

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.