The analysts covering Aggreko Plc (LON:AGK) 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. Investors however, have been notably more optimistic about Aggreko recently, with the stock price up a worthy 15% to UK£4.87 in the past week. Whether the downgrade will have a negative impact on demand for shares is yet to be seen.
Following the latest downgrade, the current consensus, from the ten analysts covering Aggreko, is for revenues of UK£1.5b in 2020, which would reflect a perceptible 6.3% reduction in Aggreko's sales over the past 12 months. Statutory earnings per share are supposed to fall 11% to UK£0.45 in the same period. Prior to this update, the analysts had been forecasting revenues of UK£1.7b and earnings per share (EPS) of UK£0.58 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.
It'll come as no surprise then, to learn that the analysts have cut their price target 8.7% to UK£6.86. 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. The most optimistic Aggreko analyst has a price target of UK£10.50 per share, while the most pessimistic values it at UK£3.18. So we wouldn't be assigning too much credibility to analyst price targets in this case, because there are clearly some widely differing views on what kind of performance this business can generate. With this in mind, we wouldn't rely too heavily on the consensus price target, as it is just an average and analysts clearly have some deeply divergent views on the business.
These estimates are interesting, but it can be useful to paint some more broad strokes when seeing how forecasts compare, both to the Aggreko's past performance and to peers in the same industry. We would highlight that sales are expected to reverse, with the forecast 6.3% revenue decline a notable change from historical growth of 2.4% over the last five years. Compare this with our data, which suggests that other companies in the same industry are, in aggregate, expected to see their revenue grow 4.0% next year. So although its revenues are forecast to shrink, this cloud does not come with a silver lining - Aggreko is expected to lag the wider industry.
The Bottom Line
The most important thing to take away is that analysts cut their earnings per share estimates, expecting a clear decline in business conditions. Regrettably, they also downgraded their revenue estimates, and the latest forecasts imply the business will grow sales slower than the wider market. With a serious cut to this year's expectations and a falling price target, we wouldn't be surprised if investors were becoming wary of Aggreko.
After a downgrade like this, it's pretty clear that previous forecasts were too optimistic. What's more, we've spotted several possible issues with Aggreko's business, like a weak balance sheet. For more information, you can click here to discover this and the 2 other risks we've identified.
We also provide an overview of the Aggreko Board and CEO remuneration and length of tenure at the company, and whether insiders have been buying the stock, here.
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