How Best One Can Trust Analysts’ Earning Estimates?

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12 August 2018

One often hear this stock market slang during every earning seasons;  “The company has beaten or its earnings has exceeded consensus’s estimate with a surprise”.     This article will tell why this happens so often at the Walls Street.

Earning Surprises

 One could always find this kind of table in the web and very often,  the list of companies with “surprise” positive earnings is always longer than the negative earnings .

Why?

There is usually only one answer i.e. the Analysts have under-estimated the earning results. 

How could that happen?

Lets examine one of the earning summary report by Lippe Alpha Insight as shown below,  one will notice that the companies are always reporting negative EPS when they make preannouncements.   These preannouncements by the companies will affect the Analysts’ estimates as no Analyst has better knowledge about the operation  than the companies.

Could this Just Be a Coincident for Q3 2018?

FactSet,  an organization who provides  financial data and analytics for  investors,  has this chart in  their web page

 One can see that there is a consistent pattern for most companies to provide negative preannouncements.    Note that not all companies will make preannouncement but those who did,  always do it with a purpose to get better stock prices.

Is This Fair?

Obviously,  not fair to the investors.  But there are no hard rules for such  preannouncement.  Moreover,  the companies are said to provide the  estimates to their “best knowledge”.   The market is now so used to this pattern of reporting that Analysts and investors are comparing  which year the market has the most positive preannouncement issued by the companies. 

Should we be concerned?

Most investors have learnt  not to trust fully the Analysts’ earning reports.   However,  there are many investors still rely on the Analysts’ report to buy stocks particularly those investors who  go after “growth stocks” rather than “valuestocks”    If these investors were  not careful in sorting out the genuine and accurate  earning reports from the bad ones,  they can be taken by surprise and lose a lot of money.

What Should We do?

To protect our interest,  always take stock market reports especially the earning reports of the Analysts as reference and confirm the earnings with other form of market reports or other reports  from other companies.  Do not just trust the market report from one company or Analyst.   Read through the company’s financial statements especially try to decipher  how the company can get such good earnings.

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