Few things can hurt a stock as much as when analysts cut their forecasts for earnings. A worsening outlook is something no investor wants to see.
Identifying a Buying Opportunity
Yet there comes a point where estimates fall so much that it could signal a buying opportunity. Enormous declines in the consensus call for earnings per share should mean that Wall Street has factored in most, if not all, of the bad news about a company.
Beyond's Promising Prospects
Take Beyond, formerly known as Overstock, which purchased some of Bed Bath and Beyond's assets after it filed for bankruptcy. According to FactSet, the average analyst estimate is for a loss of $1.83 a share for its fiscal 2024, more than 10 times the 18-cent loss expected in early July.
That is one reason why Needham analyst Anna Andreeva raised her rating on the stock to Buy from Hold on Friday. She set a target of $40 for the price, implying a hefty gain in the price.
The consensus call for 2024 earnings before interest, taxes, depreciation, and amortization has fallen spectacularly as well, she noted, meaning that expectations likely can't get much worse.
Self-Help Initiatives and Potential Cost Savings
In fact, if Beyond can create a more variable expense base that's aligned more closely to what an asset-light business needs, she said, as much as a third of the company's nonlabor operating costs could be cut. In simpler terms, because Overstock focuses on e-commerce, while Bed Bath ran a big network of stores, it may be able to eliminate some fixed expenses.
Beyond: A Potential Comeback Story in the Home Goods Industry
Beyond, a company that has been drawing comparisons to the struggling Bed Beth and Overstock, might have a brighter future ahead. While Bed Beth faced financial difficulties in its final quarters as a public company, Beyond enjoys a healthy level of liquidity, with 27% of its market cap consisting of cash reserves.
Analyst Andreeva has expressed optimism about Beyond's performance during the crucial holiday period in the fiscal fourth quarter. She believes that consensus expectations are overly pessimistic and that Beyond could surprise investors with better-than-anticipated results.
Andreeva's positive outlook sets her apart, as she is the only analyst, among ten firms covering Beyond, to rate the company as a Buy. The remaining eight firms now have a Neutral rating on the stock.
It is understandable why many people consider Beyond a "show-me" story. Bed Bath experienced a well-publicized decline, and Overstock faced its own challenges last year, such as lower revenue growth and a loss in its most recent quarter. Overstock is currently undergoing an "intense" restructuring process, including significant changes to its leadership team.
Moreover, the entire home goods industry is facing challenges. Many consumers have already moved or redecorated during the pandemic, leading to reduced spending in this category. Additionally, high interest rates exacerbate the situation.
While it is possible that Beyond might face more negative news regarding its holiday quarter and 2024 outlook, the target price set by Andreeva suggests a potential upside of over 50%, even after a 3% increase to $26.32 following her call on Friday morning. Wedbush's target is also roughly 25% higher than the current levels.
Investors who believe in Andreeva's analysis can have confidence that Beyond's financial performance has already reached a low point and may improve from here.