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Market forces rained on the parade of Centrica plc (LON:CNA) shareholders today, when the analysts downgraded their forecasts for this year. There was a fairly draconian cut to their revenue estimates, perhaps an implicit admission that previous forecasts were much too optimistic. The stock price has risen 5.8% to UK£1.34 over the past week. 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 Centrica's ten analysts is for revenues of UK£28b in 2023, which would reflect a noticeable 5.5% decline in sales compared to the last year of performance. Statutory earnings per share are supposed to nosedive 70% to UK£0.23 in the same period. Previously, the analysts had been modelling revenues of UK£33b and earnings per share (EPS) of UK£0.25 in 2023. It looks like analyst sentiment has fallen somewhat in this update, with a substantial drop in revenue estimates and a minor downgrade to earnings per share numbers as well.
See our latest analysis for Centrica
Despite the cuts to forecast earnings, there was no real change to the UK£1.48 price target, showing that the analysts don't think the changes have a meaningful impact on its intrinsic value. It could also be instructive to look at the range of analyst estimates, to evaluate how different the outlier opinions are from the mean. Currently, the most bullish analyst values Centrica at UK£1.70 per share, while the most bearish prices it at UK£1.10. This shows there is still some diversity in estimates, but analysts don't appear to be totally split on the stock as though it might be a success or failure situation.
One way to get more context on these forecasts is to look at how they compare to both past performance, and how other companies in the same industry are performing. These estimates imply that sales are expected to slow, with a forecast annualised revenue decline of 11% by the end of 2023. This indicates a significant reduction from annual growth of 0.3% over the last five years. By contrast, our data suggests that other companies (with analyst coverage) in the industry are forecast to see their revenue decline 1.0% annually for the foreseeable future. So it's pretty clear that Centrica's revenues are expected to shrink faster than the wider industry.
The Bottom Line
The most important thing to take away is that analysts cut their earnings per share estimates, expecting a clear decline in business conditions. Unfortunately they also downgraded their revenue estimates, and our aggregation of analyst estimates suggests that Centrica revenue is expected to perform worse than the wider market. Often, one downgrade can set off a daisy-chain of cuts, especially if an industry is in decline. So we wouldn't be surprised if the market became a lot more cautious on Centrica after today.