Market forces rained on the parade of CLS Holdings plc (LON:CLI) shareholders today, when the covering analyst downgraded their forecasts for this year. Both revenue and earnings per share (EPS) estimates were cut sharply as the analyst factored in the latest outlook for the business, concluding that they were too optimistic previously. Investors however, have been notably more optimistic about CLS Holdings recently, with the stock price up an impressive 19% to UK£2.03 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 sole analyst covering CLS Holdings provided consensus estimates of UK£133m revenue in 2020, which would reflect a measurable 3.8% decline on its sales over the past 12 months. Statutory earnings per share are anticipated to plummet 52% to UK£0.16 in the same period. Before this latest update, the analyst had been forecasting revenues of UK£148m and earnings per share (EPS) of UK£0.29 in 2020. It looks like analyst sentiment has declined substantially, with a substantial drop in revenue estimates and a large cut to earnings per share numbers as well.
It'll come as no surprise then, to learn that the analyst has cut their price target 5.3% to UK£2.95. There's another way to think about price targets though, and that's to look at the range of price targets put forward by analysts, because a wide range of estimates could suggest a diverse view on possible outcomes for the business. There are some variant perceptions on CLS Holdings, with the most bullish analyst valuing it at UK£3.25 and the most bearish at UK£2.50 per share. This is a very narrow spread of estimates, implying either that CLS Holdings is an easy company to value, or - more likely - the analyst is relying heavily on some key assumptions.
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. We would highlight that sales are expected to reverse, with the forecast 3.8% revenue decline a notable change from historical growth of 5.1% over the last five years. By contrast, our data suggests that other companies (with analyst coverage) in the industry are forecast to see their revenue decline 2.0% annually for the foreseeable future. The forecasts do look bearish for CLS Holdings, since they're expecting it to shrink faster than the industry.
The Bottom Line
The most important thing to take away is that the analyst cut their earnings per share estimates, expecting a clear decline in business conditions. Unfortunately they also cut their revenue estimates for this year, and they expect sales to lag the wider market. That said, earnings per share are more important for creating value for shareholders. Given the scope of the downgrades, it would not be a surprise to see the market become more wary of the business.
Even so, the longer term trajectory of the business is much more important for the value creation of shareholders. At least one analyst has provided forecasts out to 2023, which can be seen for 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.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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