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Consensus Earnings Estimates: The Basics

If you watch CNBC or read the business section of the newspaper you have probably seen references to the “street” earnings estimate for a stock, but do you know exactly what this is and how the estimate is generated? Understanding consensus earnings estimates can help you gain the insight of the professional research community.

Who Contributes Earnings Estimates to the Consensus?

Most of the large brokerage firms have analysts that research stocks and provide recommendations to their clients. Besides offering simple buy, sell or hold recommendations these analysts also calculate estimates for what they believe a particular company will report each quarter for its earnings per share.

Every analyst has his own methodology when calculating an earnings estimate. Most take into account the guidance that the company provides, economic conditions, trends in the marketplace and many other company specific metrics. Although every analyst who covers a particular company has access to the same information, the estimates can vary greatly from one analyst to another.

The Consensus

Since there can be a wide range of opinions for a company’s earnings estimate, several financial data companies provide a consensus estimate. The consensus estimate is the average of the earnings estimates from all of the brokerage firms that cover, or provide estimates for, a particular company. Thomson Reuters’ First Call and Zacks Investment Research are the two largest data providers that poll all of the brokerage firms to come up with consensus estimates.

The consensus estimate for a stock can be made up of just a handful of individual brokerage estimates or dozens of estimates. Larger companies, such as Fortune 500 companies, will have lots of analysts covering its stock while small companies may only have a couple of analysts covering it.

The consensus estimate for a stock constantly changes as analysts that contribute to the consensus revise their estimates. An analyst may change his estimate if conditions change within the company or within the economy. Analysts typically issue a research report that explains why an estimate is being changed.

The Types of Consensus Estimates

The consensus estimate most widely quoted in the financial media is the estimate for the current fiscal quarter. This estimate is known as the Q1 estimate. It is often referred to in the financial news as the “street estimate.”

Analysts also provide estimates for future quarters. The Q2 estimate is the consensus estimate for the next fiscal quarter and the Q3 and the Q4 estimates are for the next two fiscal quarters.

Full year estimates are also available. The consensus estimate for the current fiscal year is called the FY1 estimate. Analysts provide fiscal year estimates out to FY3 or up to two years after the current fiscal year.

Consensus Versus Actual Reported Earnings

The consensus estimate is just what its name states – an estimate. Every quarter a company will report its actual earnings per share. The actual earnings may match the consensus estimate, but it may be much higher or much lower.

The difference between the consensus estimate and the actual reported earnings is referred to as the earnings surprise. For example, if the consensus estimate is $0.10 per share and the company reports $0.12 per share then there is a $0.02, or 20 percent, positive earnings surprise. A negative earnings surprise is when the actual reported earnings per share are lower than the consensus estimate.

If the analysts follow a company so closely then why are the estimates not always spot on? There are many factors that drive a company’s earnings. Some are very visible to the analyst community while some cannot be seen or predicted by people outside of the company. An analyst makes his best guess from the available information.

Where to Find Consensus Estimates

Financial news television channels often talk about consensus estimates when covering a particular stock. Some newspapers also provide consensus estimates, especially before a company is due to report its quarterly earnings. The estimates provided on television and in the newspapers are typically the consensus estimates for the current fiscal quarter.

Consensus estimates can also be found in the research sections of broker websites and on free stock research websites such as Yahoo! Finance and Google Finance. These outlets often provide the consensus estimates for the current fiscal quarter and the current fiscal year. In many cases, you will need to contact your broker directly if you want to get the consensus estimate for a time period that is further out, such as the estimate for two years from now.

The consensus estimate is a powerful piece of information when analyzing a stock. It allows you to have, in one number, the research of many analysts who watch the stock on a daily basis. As an individual investor, you can watch the movement of the consensus estimate and easily see the changes in the sentiment of the analysts who cover the stock.