The analysts covering Royal Dutch Shell plc (AMS:RDSA) 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.
Following the latest downgrade, the 16 analysts covering Royal Dutch Shell provided consensus estimates of US$282b revenue in 2020, which would reflect a not inconsiderable 18% decline on its sales over the past 12 months. Statutory earnings per share are anticipated to plunge 31% to US$1.35 in the same period. Prior to this update, the analysts had been forecasting revenues of US$331b and earnings per share (EPS) of US$1.91 in 2020. Indeed, we can see that the analysts are a lot more bearish about Royal Dutch Shell’s prospects, administering a measurable cut to revenue estimates and slashing their EPS estimates to boot.
The consensus price target fell 10% to US$27.17, with the weaker earnings outlook clearly leading analyst valuation estimates. That’s not the only conclusion we can draw from this data however, as some investors also like to consider the spread in estimates when evaluating analyst price targets. There are some variant perceptions on Royal Dutch Shell, with the most bullish analyst valuing it at US$34.92 and the most bearish at US$17.86 per share. Note the wide gap in analyst price targets? This implies to us that there is a fairly broad range of possible scenarios for the underlying business.
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 18% revenue decline a notable change from historical growth of 3.7% 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 2.6% next year. It’s pretty clear that Royal Dutch Shell’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. 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. We have estimates – from multiple Royal Dutch Shell analysts – going out to 2024, 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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