Can anyone enlighten me how exactly the ‘consensus’ in earnings estimates is reached?
Is it just the average? Median? Is it weighted in any way?
I really feel like I should know this, but really don’t. Hope you can help!
cheers
Greg
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Some brokerages/ratings/etc. companies may weight estimates with algorithms (Analyst A has been within 1% of actual earnings 80% of the time over last 8 quarters so weight Heavy") for their paid clients but the consensus you read on freely available websites is a simple average of all analysts covering the stock.
Several studies I’ve read indicate that precision is pretty low but changes, their direction and degree usually are indicative of future performance, especially if the change is significant. To answer the unasked question, yes, 1 analyst can affect the consensus with a WAG but his reputation (and job) are probably on the line with each significant error. Repeats would be worse than embarrassing.
Several sites will not report estimates if only 1 analyst is on-board, or maybe if only 2, for larger capitalized firms.
Analysts reminds me of lobbyists. No further comment.
Dan
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Thanks Dan, appreciate it. Average seemed too odd to be true, but … its a weird world!
After a bit more digging, as an example, the financial media report "Amazon delivered a massive beat in third-quarter 2017. Earnings of 52 cents per share beat the Zacks Consensus Estimate by 51 cents. The figure surged 30% sequentially but was flat year over year. "
I look at Zacks, and they’re like, “ZACKS CONSENSUS ESTIMATE = THE AVERAGE OF ALL CURRENT EPS ESTIMATES”
So then I look at Zacks for Amazon for example, and the high estimate for the current quarter is 2.34 and the low estimate is 1.21, which is some spread.
I guess the spread is indicative of the amount of uncertainty which may be somehow useful. MSFT, for example, has estimate spread of 0.83 - 0.97, much narrower than Amazon.
Some others:
NTNX: -0.22 :: -0.17
AYX: -0.03 :: -0.02 ← No surprises here! (or a skeptic might suggest no one has a clue, so they’re all headed to the average…)
PSTG: 0.05 :: 0.09 ← On a percent basis, this is around AMZN uncertainty
ALGN: 0.76 :: 0.98
SQ: 0.05 :: 0.09 ← Lots of uncertainty.
GOOGL: 9 :: 10.92
and the king of “no one has a clue” in the small sample I looked at…
SHOP 0.02 :: 0.1
You could be the analyst who went 0.02, and they could return 0.08, and you would be 300% out.
Not sure any of this is very useful.
Greg
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Can anyone enlighten me how exactly the ‘consensus’ in earnings estimates is reached?
consensus
noun
a general agreement: [as modifier]: a consensus view | a consensus of opinion among judges.
It’s not a consensus in my opinion, they don’t get together to discuss the stocks and agree on something. It’s some kind of average of a group of opinions, I don’t know how it’s calculated.
Denny Schlesinger
So then I look at Zacks for Amazon for example, and the high estimate for the current quarter is 2.34 and the low estimate is 1.21, which is some spread.
If you look at amazon’s guidance, you’ll see that they give at least as wide a spread as that.
Saul
Reading through the five posts about earnings estimates validates my attitude about completely ignoring them. I do, however, pay attention to the guidance provided by the company. Despite the fact that I know most companies are motivated to:
- Guide low so that it’s easy to meet/beat when they report, and
- Put lipstick on a pig if things went south.
As noted in a different thread, the “delayed orders” excuse for missing guidance is seldom accounted for by upping future guidance for a future quarter to account for those delayed orders.
“In which quarter has the guidance been adjusted to reflect the arrival of those delayed orders?” seems like such an obvious question for analysts to ask, yet I don’t recall ever reading a transcript where the question was actually asked. That could be a function of a faulty memory, I’ve never looked for the question before reading this and the other thread so maybe it’s not so obvious.
So then I look at Zacks for Amazon for example, and the high estimate for the current quarter is 2.34 and the low estimate is 1.21, which is some spread.
Hi Greg,
There are many types of analysts and most are in an organization whose name I don’t recall (Analysts
Anonymous? :)). I believe this is where all public analyst estimates are announced from.
There are many theories regarding analyst information from companies and CEOs too. Some companies spoon
feed analysts info including projections. Some are to the penny, yet often correct. Some companies give
ranges, the width of which varies greatly. Many firms don’t have analysts following them. And some
companies give 0 predictive advice to analysts. These include some huge firms with household
recogniction. Analysts following them almost have to think, and there are often some real surprises
here.
Some companies lowball estimates (some analysts too) all making the company look good at earnings time.
Some companies and analysts regularly push estimates to the upper limit of reasonableness, most often
because their focus is on their short-term stock price.
It’s really a mixed bag and therefore bound to be less than super accurate. Even a CEO of a bigger,
well-run company knows within a pretty small percentage what sales, labor, expenses and profit will be.
Their catch-22 is if they give a lowball estimate or a wide estimate range, they appear less informed
than they actually are. But if they give an accurate estimate to the penny, they take a very real risk
of looking quite stupid if anything goes wrong. Stuff happens.
Consider that you’ve probably never paid an analyst any type of fee and I know I haven’t. If you really
want to understand analysts (I can’t say it will be particularly valuable) then you need to figure out
how analysts are paid and by whom. This isn’t the place for that discussion, so just realize that it
ain’t pretty nor is it reassuring. At every turn there are conflicting interests. Even the most honest
people have a hard time coming up with a fair way to pay them but the industry feels they are needed
and when the proverbial poop hits the occasional proverbial fan, sometimes they do fill a need for us
investors who lack inside information. It’s the definition of conundrum.
My strategy is to be aware of any “unusual” musings but to never make a decision based on the musings
unless a reliable verification can be found. An exception might be when their information is earnings
implosion related, as few stretch the truth with derogatory stories. On the upside, it seems almost
anything goes.
One point to remember: Analysts have to have a decent relationship with their companies almost like with
the companies they are employed by. If not, they get little or no information. Therefore, when even a
single analyst downgrades a stock, I give it more weight than 1 who raises theirs. And a group
making a change up or especially down, I personally always pay attention. They don’t want to anger their
companies’ management team, but you can’t call a sinking ship a nice yacht for very long.
That’s just been my experience. You may learn, or may already have learned, a better strategy.
Dan
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Thanks everyone, really appreciate it. Its interesting to me the … basicness of financial reporting, and just how much of it is noise, or click-bait if you’re a bit more cynical.
I’ll continue to spend some (but not that many) brain cycles thinking about the relevance. I think the concept of watching the group, particularly on downgrades, may have a lot of value.
Thanks again
Greg