The analysts covering Redwood Trust, Inc. (NYSE:RWT) 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 the analysts factored in the latest outlook for the business, concluding that they were too optimistic previously. Bidders are definitely seeing a different story, with the stock price of US$3.87 reflecting a 40% rise in the past week. Whether the downgrade will have a negative impact on demand for shares is yet to be seen.
Following the downgrade, the consensus from five analysts covering Redwood Trust is for revenues of US$163m in 2020, implying a substantial 50% decline in sales compared to the last 12 months. Statutory earnings per share are anticipated to nosedive 49% to US$0.84 in the same period. Prior to this update, the analysts had been forecasting revenues of US$223m and earnings per share (EPS) of US$1.81 in 2020. Indeed, we can see that the analysts are a lot more bearish about Redwood Trust's prospects, administering a pretty serious reduction to revenue estimates and slashing their EPS estimates to boot.
The consensus price target fell 33% to US$10.33, with the weaker earnings outlook clearly leading analyst valuation estimates. The consensus price target is just an average of individual analyst targets, so - it could be handy to see how wide the range of underlying estimates is. Currently, the most bullish analyst values Redwood Trust at US$18.00 per share, while the most bearish prices it at US$5.00. So we wouldn't be assigning too much credibility to analyst price targets in this case, because there are clearly some widely differing views on what kind of performance this business can generate. With this in mind, we wouldn't rely too heavily on the consensus price target, as it is just an average and analysts clearly have some deeply divergent views on the business.
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 50%, a significant reduction from annual growth of 1.9% over the last five years. By contrast, our data suggests that other companies (with analyst coverage) in the same industry are forecast to see their revenue grow 24% annually for the foreseeable future. So although its revenues are forecast to shrink, this cloud does not come with a silver lining - Redwood Trust is expected to lag the wider industry.
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 Redwood Trust. Regrettably, they also downgraded their revenue estimates, and the latest forecasts imply the business will grow sales slower than the wider market. With a serious cut to this year's expectations and a falling price target, we wouldn't be surprised if investors were becoming wary of Redwood Trust.
That said, the analysts might have good reason to be negative on Redwood Trust, given dilutive stock issuance over the past year. 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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