The latest analyst coverage could presage a bad day for Knowles Corporation (NYSE:KN), with the analysts making across-the-board cuts to their statutory estimates that might leave shareholders a little shell-shocked. Revenue and earnings per share (EPS) forecasts were both revised downwards, with analysts seeing grey clouds on the horizon.
After the downgrade, the consensus from Knowles' nine analysts is for revenues of US$711m in 2020, which would reflect a not inconsiderable 15% decline in sales compared to the last year of performance. Statutory earnings per share are supposed to dive 63% to US$0.16 in the same period. Prior to this update, the analysts had been forecasting revenues of US$792m and earnings per share (EPS) of US$0.34 in 2020. It looks like analyst sentiment has declined substantially, with a measurable cut to revenue estimates and a large cut to earnings per share numbers as well.
Analysts made no major changes to their price target of US$18.11, suggesting the downgrades are not expected to have a long-term impact on Knowles'valuation. Fixating on a single price target can be unwise though, since the consensus target is effectively the average of analyst price targets. As a result, some investors like to look at the range of estimates to see if there are any diverging opinions on the company's valuation. There are some variant perceptions on Knowles, with the most bullish analyst valuing it at US$22.00 and the most bearish at US$14.00 per share. There are definitely some different views on the stock, but the range of estimates is not wide enough as to imply that the situation is unforecastable, in our view.
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 2.1% annually. Worse, forecasts are essentially predicting the decline to accelerate, with the estimate for a 15% 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 6.5% next year. So while a broad number of companies are forecast to decline, unfortunately Knowles is expected to see its sales affected worse than other companies in the industry.
The Bottom Line
The biggest issue in the new estimates is that analysts have reduced their earnings per share estimates, suggesting business headwinds lay ahead for Knowles. Unfortunately analysts also downgraded their revenue estimates, and industry data suggests that Knowles' revenues are expected to grow slower than the wider market. We're also surprised to see that the price target went unchanged. Still, deteriorating business conditions (assuming accurate forecasts!) can be a leading indicator for the stock price, so we wouldn't blame investors for being more cautious on Knowles after the downgrade.
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 Knowles analysts - going out to 2021, and you can see them free on our platform here.
Another way to search for interesting companies that could be reaching an inflection point is to track whether management are buying or selling, with our free list of growing companies that insiders are buying.
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