Need To Know: Analysts Just Made A Substantial Cut To Their Centennial Resource Development, Inc. (NASDAQ:CDEV) Estimates

The analysts covering Centennial Resource Development, Inc. (NASDAQ:CDEV) 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 current consensus, from the nine analysts covering Centennial Resource Development, is for revenues of US$803m in 2020, which would reflect an uncomfortable 15% reduction in Centennial Resource Development's sales over the past 12 months. Following this this downgrade, earnings are now expected to tip over into loss-making territory, with the analysts forecasting losses of US$0.33 per share in 2020. Yet before this consensus update, the analysts had been forecasting revenues of US$928m and losses of US$0.062 per share in 2020. So there's been quite a change-up of views after the recent consensus updates, with the analysts making a serious cut to their revenue forecasts while also expecting losses per share to increase.

See our latest analysis for Centennial Resource Development

The consensus price target fell 25% to US$3.08, implicitly signalling that lower earnings per share are a leading indicator for Centennial Resource Development's valuation. Fixating on a single price target can be unwise though, since the consensus target is effectively the average of analyst price targets. As a result, some investors like to look at the range of estimates to see if there are any diverging opinions on the company's valuation. The most optimistic Centennial Resource Development analyst has a price target of US$12.00 per share, while the most pessimistic values it at US$0.60. We would probably assign less value to the forecasts in this situation, because such a wide range of estimates could imply that the future of this business is difficult to value accurately. As a result it might not be possible to derive much meaning from the consensus price target, which is after all just an average of this wide range of estimates.

Taking a look at the bigger picture now, one of the ways we can understand these forecasts is to see how they compare to both past performance and industry growth estimates. These estimates imply that sales are expected to slow, with a forecast revenue decline of 15%, a significant reduction from annual growth of 42% 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 1.1% next year. So although its revenues are forecast to shrink, this cloud does not come with a silver lining - Centennial Resource Development is expected to lag the wider industry.

The Bottom Line

The most important thing to note from this downgrade is that the consensus increased its forecast losses this year, suggesting all may not be well at Centennial Resource Development. Unfortunately analysts also downgraded their revenue estimates, and industry data suggests that Centennial Resource Development's revenues are expected to grow 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 Centennial Resource Development 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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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