The analysts covering China Machinery Engineering Corporation (HKG:1829) delivered a dose of negativity to shareholders today, by making a substantial revision to their statutory forecasts for this year. Revenue and earnings per share (EPS) forecasts were both revised downwards, with analysts seeing grey clouds on the horizon.
Following the downgrade, the latest consensus from China Machinery Engineering's five analysts is for revenues of CN¥29b in 2020, which would reflect an okay 4.1% improvement in sales compared to the last 12 months. Statutory earnings per share are expected to be CN¥0.53, roughly flat on the last 12 months. Prior to this update, the analysts had been forecasting revenues of CN¥35b and earnings per share (EPS) of CN¥0.59 in 2020. Indeed, we can see that the analysts are a lot more bearish about China Machinery Engineering's prospects, administering a substantial drop in revenue estimates and slashing their EPS estimates to boot.
The consensus price target fell 12% to CN¥3.85, with the weaker earnings outlook clearly leading analyst valuation estimates. 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 China Machinery Engineering, with the most bullish analyst valuing it at CN¥5.32 and the most bearish at CN¥2.06 per share. This is a fairly broad spread of estimates, suggesting that the analysts are forecasting a wide range of possible outcomes for the business.
These estimates are interesting, but it can be useful to paint some more broad strokes when seeing how forecasts compare, both to the China Machinery Engineering's past performance and to peers in the same industry. We would highlight that China Machinery Engineering's revenue growth is expected to slow, with forecast 4.1% increase next year well below the historical 6.6% 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 8.5% next year. Factoring in the forecast slowdown in growth, it seems obvious that China Machinery Engineering is also expected to grow slower than other industry participants.
The Bottom Line
The biggest issue in the new estimates is that analysts have reduced their earnings per share estimates, suggesting business headwinds lay ahead for China Machinery Engineering. 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.
Still, the long-term prospects of the business are much more relevant than next year's earnings. We have estimates - from multiple China Machinery Engineering analysts - going out to 2022, 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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