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Market forces rained on the parade of Prudential plc (LON:PRU) 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.
Following the latest downgrade, the current consensus, from the nine analysts covering Prudential, is for revenues of US$31b in 2021, which would reflect a painful 45% reduction in Prudential's sales over the past 12 months. Statutory earnings per share are presumed to surge 75% to US$1.43. Before this latest update, the analysts had been forecasting revenues of US$49b and earnings per share (EPS) of US$1.58 in 2021. It looks like analyst sentiment has fallen somewhat in this update, with a pretty serious reduction to revenue estimates and a small dip in earnings per share numbers as well.
See our latest analysis for Prudential
Despite the cuts to forecast earnings, there was no real change to the UK£16.34 price target, showing that the analysts don't think the changes have a meaningful impact on its intrinsic value. 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. Currently, the most bullish analyst values Prudential at UK£18.00 per share, while the most bearish prices it at UK£12.00. 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. One more thing stood out to us about these estimates, and it's the idea that Prudential's decline is expected to accelerate, with revenues forecast to fall at an annualised rate of 45% to the end of 2021. This tops off a historical decline of 8.3% a year over the past five years. By contrast, our data suggests that other companies (with analyst coverage) in the industry are forecast to see their revenue shrink 6.4% per year. While this is interesting, Prudential's, revenues are still expected to shrink next year, and at a faster rate 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 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. We're also surprised to see that the price target went unchanged. Still, deteriorating business conditions (assuming accurate forecasts!) can be a leading indicator for the stock price, so we wouldn't blame investors for being more cautious on Prudential after the downgrade.