The latest analyst coverage could presage a bad day for Codan Limited (ASX:CDA), with the analysts making across-the-board cuts to their statutory estimates that might leave shareholders a little shell-shocked. This report focused on revenue estimates, and it looks as though the consensus view of the business has become substantially more conservative.
Following the downgrade, the latest consensus from Codan's six analysts is for revenues of AU$520m in 2022, which would reflect an okay 4.2% improvement in sales compared to the last 12 months. Statutory earnings per share are forecast to be AU$0.56, approximately in line with the last 12 months. Before this latest update, the analysts had been forecasting revenues of AU$582m and earnings per share (EPS) of AU$0.60 in 2022. Indeed, we can see that analyst sentiment has declined measurably after the new consensus came out, with a measurable cut to revenue estimates and a minor downgrade to EPS estimates to boot.
It'll come as no surprise then, to learn that the analysts have cut their price target 16% to AU$12.06. 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 Codan, with the most bullish analyst valuing it at AU$13.70 and the most bearish at AU$10.00 per share. This shows there is still some diversity in estimates, but analysts don't appear to be totally split on the stock as though it might be a success or failure situation.
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. It's pretty clear that there is an expectation that Codan's revenue growth will slow down substantially, with revenues to the end of 2022 expected to display 8.7% growth on an annualised basis. This is compared to a historical growth rate of 18% over the past five years. By way of comparison, the other companies in this industry with analyst coverage are forecast to grow their revenue at 29% per year. So it's pretty clear that, while revenue growth is expected to slow down, the wider industry is also expected to grow faster than Codan.
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. Furthermore, there was a cut to the price target, suggesting that the latest news has led to more pessimism about the intrinsic value of the business. Given the stark change in sentiment, we'd understand if investors became more cautious on Codan after today.
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 Codan's business, like concerns around earnings quality. For more information, you can click here to discover this and the 2 other risks we've identified.
Of course, seeing company management invest large sums of money in a stock can be just as useful as knowing whether analysts are downgrading their estimates. So you may also wish to search this free list of stocks that insiders are buying.
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