The analysts covering Think Childcare Limited (ASX:TNK) 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. Shares are up 8.4% to AU$0.90 in the past week. Investors could be forgiven for changing their mind on the business following the downgrade; but it's not clear if the revised forecasts will lead to selling activity.
Following the downgrade, the current consensus from Think Childcare's twin analysts is for revenues of AU$132m in 2020 which - if met - would reflect a notable 14% increase on its sales over the past 12 months. Statutory earnings per share are presumed to jump 209% to AU$0.11. Prior to this update, the analysts had been forecasting revenues of AU$150m and earnings per share (EPS) of AU$0.15 in 2020. Indeed, we can see that the analysts are a lot more bearish about Think Childcare's prospects, administering a measurable cut to revenue estimates and slashing their EPS estimates to boot.
The consensus price target fell 15% to AU$1.34, with the weaker earnings outlook clearly leading analyst valuation estimates. It could also be instructive to look at the range of analyst estimates, to evaluate how different the outlier opinions are from the mean. Currently, the most bullish analyst values Think Childcare at AU$1.50 per share, while the most bearish prices it at AU$1.20. With such a narrow range of valuations, analysts apparently share similar views on what they think the business is worth.
Of course, another way to look at these forecasts is to place them into context against the industry itself. It's pretty clear that there is an expectation that Think Childcare's revenue growth will slow down substantially, with revenues next year expected to grow 14%, compared to a historical growth rate of 25% over the past five years. Juxtapose this against the other companies in the industry with analyst coverage, which are forecast to grow their revenues (in aggregate) 13% next year. So it's pretty clear that, while Think Childcare's revenue growth is expected to slow, it's expected to grow roughly in line with 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 Think Childcare. There was also a drop in their revenue estimates, although as we saw earlier, forecast growth is only expected to be about the same as the wider market. Given the scope of the downgrades, it would not be a surprise to see the market become more wary of the business.
That said, the analysts might have good reason to be negative on Think Childcare, given its declining profit margins. Learn more, and discover the 4 other concerns we've identified, for free on our platform here.
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