The latest analyst coverage could presage a bad day for Source Energy Services Ltd. (TSE:SHLE), with the analysts making across-the-board cuts to their statutory estimates that might leave shareholders a little shell-shocked. 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.

Following the latest downgrade, the six analysts covering Source Energy Services provided consensus estimates of CA$246m revenue in 2020, which would reflect a substantial 26% decline on its sales over the past 12 months. Losses are predicted to fall substantially, shrinking 47% to CA$0.78. Yet prior to the latest estimates, the analysts had been forecasting revenues of CA$278m and losses of CA$0.47 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 Source Energy Services  TSX:SHLE Past and Future Earnings April 20th 2020

The consensus price target fell 14% to CA$0.14, with the analysts clearly concerned about the company following the weaker revenue and earnings outlook. 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. Currently, the most bullish analyst values Source Energy Services at CA$0.25 per share, while the most bearish prices it at CA$0.05. 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. 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. We would highlight that sales are expected to reverse, with the forecast 26% revenue decline a notable change from historical growth of 21% over the last five years. Yet aggregate analyst estimates for other companies in the industry suggest that industry revenues are forecast to decline 13% next year. So it's pretty clear that Source Energy Services' revenues are expected to shrink faster than the wider industry.

The Bottom Line

The most important thing to take away is that analysts increased their loss per share estimates for this year. 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. After such a stark change in sentiment from analysts, we'd understand if readers now felt a bit wary of Source Energy Services.

With that said, the long-term trajectory of the company's earnings is a lot more important than next year. We have estimates - from multiple Source Energy Services analysts - going out to 2022, and you can see them free on our platform here.

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.

If you spot an error that warrants correction, please contact the editor at [email protected]. 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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