Analysts covering China Southern Airlines Company Limited (HKG:1055) sent a dose of negativity to shareholders today, by making a substantial revision to their statutory guidance for this year. Both revenue and earnings per share (EPS) forecasts have been revised down as analysts see gray clouds on the horizon.
Following the downgrade, the latest consensus from China Southern Airlines’ 14 analysts is for revenue of 105 billion Canadian yen in 2022, which would reflect a credible 2.6% improvement in sales over the past 12 months. Losses are expected to climb 45% to C¥1.08 per share. Yet prior to this consensus update, analysts were forecasting revenue of 124 billion Canadian yen and losses of 0.41 billion domestic yen per share in 2022. As a result, there has been a clear shift in sentiment, with analysts administering a notable reduction in earnings estimates this year, while increasing their per-share loss forecasts.
Check out our latest analysis for China Southern Airlines
There was no major change in the consensus price target of CN¥4.18, indicating that activity is roughly in line with expectations, despite lower earnings per share guidance. It might also be instructive to look at the range of analysts’ estimates, to gauge how different the outlier opinions are from the mean. China Southern Airlines’ most optimistic analyst has a price target of CN¥6.34 per share, while the most pessimistic puts it at CN¥3.49. Notice the wide gap between analyst price targets? This implies to us that there is a fairly wide range of possible scenarios for the underlying activity.
Looking at the big picture, one way to make sense of these forecasts is to see how they compare to both past performance and industry growth estimates. One thing that emerges from these estimates is that China Southern Airlines is expected to grow faster in the future than in the past, with revenues expected to show 3.5% annualized growth through the end of 2022. If that is achieved, this would be a much better result than the 5.5% annual decline of the past five years. Compare that to analyst estimates for the entire industry, which suggest that (in total) industry revenue is expected to grow 24% annually for the foreseeable future. Although China Southern Airlines’ revenue is expected to improve, it appears analysts are still bearish on the business, predicting slower growth than the overall industry.
The most important thing to remember is that analysts have raised their loss per share estimates for this year. Unfortunately, analysts have also lowered their revenue estimates, and industry data suggests that China Southern Airlines’ revenue is expected to grow more slowly than the broader market. We are also surprised to see that the price target remained unchanged. Nonetheless, deteriorating trading conditions (assuming accurate forecasts!) can be a leading indicator for the stock price, so we wouldn’t blame investors for being more cautious about China Southern Airlines after the degradation.
After a downgrade like this, it’s pretty clear that previous forecasts were overly optimistic. Additionally, we have spotted several possible issues with China Southern Airlines’ business, such as the issuance of dilutive stock over the past year. For more information, you can click here to discover this flag and the 2 other flags that we have identified.
Of course, see the management of the company invest large sums of money in a stock can be just as useful as knowing if analysts are lowering their estimates. So you can also search this free list of stocks that insiders buy.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.