An earnings estimate is an analyst’s projection of a company’s future quarterly or annual earnings per share (EPS). These estimates play a crucial role in valuing a firm. By predicting future earnings, analysts can use cash flow analysis to approximate the fair value of a company, which in turn sets a target share price.
Key Insights
- Earnings estimates forecast a company’s future quarterly or annual EPS.
- Investors heavily rely on these predictions to gauge performance and make investment decisions.
- The consensus earnings estimate is based on the forecasts of multiple equity analysts covering the stock.
- A company’s performance relative to its earnings estimates can significantly influence its stock price in the short term.
- Earnings surprises occur when a company exceeds or falls short of consensus estimates.
The Mechanics of Earnings Estimates
Analysts derive EPS estimates using forecasting models, management guidance, and fundamental company data. These estimates help market participants evaluate a company’s performance. If a company meets, beats, or falls short of its earnings estimates, it can impact the stock’s price significantly in the short term.
Creating Consensus Estimates
Analysts’ earnings estimates are often combined to form consensus estimates, which serve as benchmarks for performance evaluation. For example, a company missing or surpassing these estimates usually refers to consensus numbers. Various firms like Refinitiv and Zacks Investment Research compile and publish these consensus estimates.
Consensus numbers are also accessible through financial publications and websites like Yahoo! Finance, Bloomberg, Visible Alpha, Morningstar, and Google Finance. Typically, consensus estimates are factored into the stock price of a company. Nevertheless, stocks with high estimated earnings can fall short of market expectations, while stocks with low expectations might outperform, creating a paradox.
Transforming Estimations into Outcomes: A Case Study
Let’s delve deeper into the example of a well-known company, Amazon (AMZN), to understand consensus earnings estimates better.
| Amazon Earnings Per Share Estimates |
| Earnings Estimate | Current Qtr. (Jun 2021) | Next Qtr. (Sep 2021) | Current Year (2021) | Next Year (2022) |
|---|---|---|---|---|
| Avg. Estimate | 12.27 | 12.97 | 55.88 | 72.3 |
| Low Estimate | 9.77 | 6.84 | 42.68 | 45.11 |
| High Estimate | 15.18 | 17.7 | 71.13 | 96.53 |
| Year Ago EPS | 10.3 | 12.37 | 41.83 | 55.88 |
| No. of Analysts | 36 | 36 | 46 | 46 |
Amazon’s consensus earnings estimates were compiled from 36 to 46 analysts, leading to an average EPS estimate that guides investor decisions and stock price expectations.
Special Considerations: Ups and Downs of Earnings Surprises
Earnings surprises arise when a company dramatically overperforms or underperforms against the consensus estimate. If a company beats the estimate, it’s a positive or upside surprise; if it misses, it’s a negative surprise. For instance, here’s Amazon’s recent earnings surprises history:
| Earnings History | 6/29/2020 | 9/29/2020 | 12/30/2020 | 3/30/2021 |
|---|---|---|---|---|
| EPS Est. | 1.46 | 7.41 | 7.23 | 9.54 |
| EPS Actual | 10.3 | 12.37 | 14.09 | 15.79 |
| Difference | 8.84 | 4.96 | 6.86 | 6.25 |
| Surprise % | 605.50% | 66.90% | 94.90% | 65.50% |
Significant positive earnings surprises often lead to above-average stock performance, while substantial negative earnings surprises typically result in below-average performance. Consequently, companies vigilantly manage their earnings to meet or exceed consensus estimates through strategic forward guidance, enabling them to consistently outdo expectations and diminish the surprise effect.
Related Terms: Earnings Per Share (EPS), Fair Value, Consensus Estimates, Forward Guidance, Earnings Surprise.
References
- Corporate Finance Institute. “What is an Earnings Estimate?”
