MediPharm Labs Corp (MEDIF)

[FUNMAN]

Some MediPharm Labs Corp. (TSE:LABS) Analysts Just Made A Major Cut To Next Year's Estimates

By Simply Wall St
PublishedMay 23, 2021
TSX:LABS

https://simplywall.st/stocks/ca/pharmaceuticals-biotech/tsx-labs/medipharm-labs-shares/news/some-medipharm-labs-corp-tselabs-analysts-just-made-a-major

The latest analyst coverage could presage a bad day for MediPharm Labs Corp. (TSE:LABS), 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 analysts factored in the latest outlook for the business, concluding that they were too optimistic previously. Surprisingly the share price has been buoyant, rising 15% to CA$0.46 in the past 7 days. Whether the downgrade will have a negative impact on demand for shares is yet to be seen.

Following the downgrade, the most recent consensus for MediPharm Labs from its six analysts is for revenues of CA$36m in 2021 which, if met, would be a solid 18% increase on its sales over the past 12 months. Losses are predicted to fall substantially, shrinking 66% to CA$0.14. Yet before this consensus update, the analysts had been forecasting revenues of CA$48m and losses of CA$0.077 per share in 2021. Ergo, there's been a clear change in sentiment, with the analysts administering a notable cut to this year's revenue estimates, while at the same time increasing their loss per share forecasts.

The consensus price target fell 9.1% to CA$0.75, implicitly signalling that lower earnings per share are a leading indicator for MediPharm Labs' valuation. That's not the only conclusion we can draw from this data however, as some investors also like to consider the spread in estimates when evaluating analyst price targets. Currently, the most bullish analyst values MediPharm Labs at CA$1.25 per share, while the most bearish prices it at CA$0.40. As you can see the range of estimates is wide, with the lowest valuation coming in at less than half the most bullish estimate, suggesting there are some strongly diverging views on how think this business will perform. 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.

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. One thing stands out from these estimates, which is that MediPharm Labs is forecast to grow faster in the future than it has in the past, with revenues expected to display 25% annualised growth until the end of 2021. If achieved, this would be a much better result than the 74% annual decline over the past year. Compare this against analyst estimates for the broader industry, which suggest that (in aggregate) industry revenues are expected to grow 35% annually for the foreseeable future. Although MediPharm Labs' revenues are expected to improve, it seems that the analysts are still bearish on the business, forecasting it to grow slower than the broader 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 MediPharm Labs. Regrettably, they also downgraded their revenue estimates, and the latest forecasts imply the business will grow sales slower than the wider market. Given the scope of the downgrades, it would not be a surprise to see the market become more wary of the business.

After a downgrade like this, it's pretty clear that previous forecasts were too optimistic. What's more, we've spotted several possible issues with MediPharm Labs' business, like major dilution from new stock issuance in the past year.