Analyst Forecasts Just Became More Bearish On Softcat plc (LON:SCT)

One thing we could say about the analysts on Softcat plc (LON:SCT) - they aren't optimistic, having just made a major negative revision to their near-term (statutory) forecasts for the organization. There was a fairly draconian cut to their revenue estimates, perhaps an implicit admission that previous forecasts were much too optimistic.

Following the downgrade, the most recent consensus for Softcat from its nine analysts is for revenues of UK£1.2b in 2023 which, if met, would be a credible 7.5% increase on its sales over the past 12 months. Statutory earnings per share are supposed to dip 2.5% to UK£0.54 in the same period. Prior to this update, the analysts had been forecasting revenues of UK£1.3b and earnings per share (EPS) of UK£0.54 in 2023. Indeed we can see that the consensus opinion has undergone some fundamental changes following the recent consensus updates, with a substantial drop in revenues and some minor tweaks to earnings numbers.

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The consensus price target was reduced 5.5% to UK£15.18, with the lower revenue forecasts indicating negative sentiment towards Softcat, even though earnings forecasts were unchanged. 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. The most optimistic Softcat analyst has a price target of UK£20.10 per share, while the most pessimistic values it at UK£11.50. 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.

Of course, another way to look at these forecasts is to place them into context against the industry itself. We would highlight that Softcat's revenue growth is expected to slow, with the forecast 7.5% annualised growth rate until the end of 2023 being well below the historical 9.6% p.a. growth over the last five years. Compare this against other companies (with analyst forecasts) in the industry, which are in aggregate expected to see revenue growth of 17% annually. Factoring in the forecast slowdown in growth, it seems obvious that Softcat is also expected to grow slower than other industry participants.

The Bottom Line

The most important thing to take away is that there's been no major change in sentiment, with analysts reconfirming that earnings per share are expected to continue performing in line with their prior expectations. 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. Overall, given the drastic downgrade to this year's forecasts, we'd be feeling a little more wary of Softcat going forwards.

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 Softcat's business, like concerns around earnings quality. For more information, you can click here to discover this and the 1 other warning sign we've identified.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.