Market forces rained on the parade of Continental Resources, Inc. (NYSE:CLR) shareholders today, when the analysts downgraded their 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. At US$11.02, shares are up 5.1% in the past 7 days. Investors could be forgiven for changing their mind on the business following the downgrade; but it's not clear if the revised forecasts will lead to selling activity.
After the downgrade, the consensus from Continental Resources' 19 analysts is for revenues of US$2.2b in 2020, which would reflect a substantial 47% decline in sales compared to the last year of performance. Following this this downgrade, earnings are now expected to tip over into loss-making territory, with the analysts forecasting losses of US$1.58 per share in 2020. Yet before this consensus update, the analysts had been forecasting revenues of US$2.6b and losses of US$1.41 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.
There was no major change to the consensus price target of US$12.97, signalling that the business is performing roughly in line with expectations, despite lower earnings per share forecasts. 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 Continental Resources analyst has a price target of US$34.00 per share, while the most pessimistic values it at US$4.00. With such a wide range in price targets, the analysts are almost certainly betting on widely diverse outcomes for the underlying business. 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.
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. These estimates imply that sales are expected to slow, with a forecast revenue decline of 47%, a significant reduction from annual growth of 8.8% over the last five years. Yet aggregate analyst estimates for other companies in the industry suggest that industry revenues are forecast to decline 1.3% next year. The forecasts do look bearish for Continental Resources, since they're expecting it to shrink faster than the 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 Continental Resources. Unfortunately they also cut their revenue estimates for this year, and they expect sales to lag the wider market. That said, earnings per share are more important for creating value for shareholders. The lack of change in the price target is puzzling in light of the downgrade but, with a serious decline expected this year, we wouldn't be surprised if investors were a bit wary of Continental Resources.
As you can see, the analysts clearly aren't bullish, and there might be good reason for that. We've identified some potential issues with Continental Resources' financials, such as a weak balance sheet. For more information, you can click here to discover this and the 2 other flags we've identified.
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