Market forces rained on the parade of Washington H. Soul Pattinson and Company Limited (ASX:SOL) shareholders today, when the analysts downgraded their forecasts for this year. Both revenue and earnings per share (EPS) forecasts went under the knife, suggesting analysts have soured majorly on the business. Surprisingly the share price has been buoyant, rising 14% to AU$24.78 in the past 7 days. With such a sharp increase, it seems brokers may have seen something that is not yet being priced in by the wider market.
Following the latest downgrade, the current consensus, from the two analysts covering Washington H. Soul Pattinson, is for revenues of AU$1.1b in 2021, which would reflect a substantial 23% reduction in Washington H. Soul Pattinson's sales over the past 12 months. Statutory earnings per share are supposed to tumble 89% to AU$0.45 in the same period. Before this latest update, the analysts had been forecasting revenues of AU$1.4b and earnings per share (EPS) of AU$0.84 in 2021. Indeed, we can see that the analysts are a lot more bearish about Washington H. Soul Pattinson's prospects, administering a sizeable cut to revenue estimates and slashing their EPS estimates to boot.
Despite the cuts to forecast earnings, there was no real change to the AU$21.01 price target, showing that the analysts don't think the changes have a meaningful impact on its intrinsic value. The consensus price target is just an average of individual analyst targets, so - it could be handy to see how wide the range of underlying estimates is. The most optimistic Washington H. Soul Pattinson analyst has a price target of AU$23.31 per share, while the most pessimistic values it at AU$18.70. Still, with such a tight range of estimates, it suggests the analysts have a pretty good idea of what they think the company is worth.
Looking at the bigger picture now, one of the ways we can make sense of these forecasts is to see how they measure up against both past performance and industry growth estimates. We would highlight that sales are expected to reverse, with the forecast 23% revenue decline a notable change from historical growth of 20% 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 6.1% next year. It's pretty clear that Washington H. Soul Pattinson's revenues are expected to perform substantially worse than 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. 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 Washington H. Soul Pattinson 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 analyst estimates for Washington H. Soul Pattinson going out as far as 2025, 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.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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