What Is an Earnings Estimate?
An earnings estimate is an analyst's estimate for a company's future quarterly or annual earnings per share(EPS). Future earnings estimates are arguably the most important input when attempting to value a firm. By placing estimates on the earnings of a firm for certain periods (quarterly, annually, etc.), analysts can then use cash flow analysis to approximate fair value for a company, which in turn will give a target share price.
Investors often rely on earnings estimates to analyze different stocks and decide whether to buy or sell them.
- An earnings estimate is an analyst's forecast for a public company's future quarterly or annual earnings per share(EPS).
- Investors rely heavily on earnings estimates to gauge a company's performance and make investment decisions about it.
- Most investors use a consensus earnings estimate, a forecast of apublic company'sprojected earnings basedon the combined estimates of all equityanalyststhat cover the stock.
- Whether a company meets, beats, or misses its earnings estimates can impact the price of the underlying stock, particularly in the short term.
- Earnings surprises occur when a company misses the consensus estimate either by earning more than expected or less.
Understanding an Earnings Estimate
Analysts use forecasting models, management guidance, and fundamental information on the company to derive an EPS estimate. Market participants rely heavily on earnings estimates to gauge a company's performance. So whether a company meets, beats, or misses its earnings estimates can impact the price of the underlying stock, particularly in the short term.
Analysts' earnings estimates are often aggregated to create consensus estimates. These are used as a benchmark against which the company's performance is evaluated. When you hear that a company has "missed estimates" or "beaten estimates," it's usually in reference to consensus estimates.
A few companies, such as Refinitiv andZacks Investment Research, compile estimates and compute the average or consensus. Their forecasts can be found instock quotations or financial publications such as TheWall Street Journal.Consensus numbers can also be found at a number of financial websites such as Yahoo! Finance, Bloomberg,Visible Alpha,Morningstar.com, andGoogle Finance.
Published consensus earnings estimates frequently are reflected in the stock price of a company. But sometimes they have an adverse effect. The shares of firms with high earnings estimates tend to falter as the companies' performance doesn't live up to the market's expectations—they can easily disappoint. Conversely, firms with low earnings estimates tend to perform better than anticipated—because of the low bar: They've nowhere to go but up.
Example of an Earnings Estimate
Earnings estimates are found by looking up individual stocks, Take, for example, Amazon (AMZN). Here is a roundup of its consensus earnings estimates, as of Jun. 7, 2021.
| Amazon Earnings Per Share Estimates | ||||
|---|---|---|---|---|
| Earnings Estimate | Current Qtr.(Jun2021) | Next Qtr.(Sep2021) | 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 |
Special Considerations
Earnings surprises occur when a company misses the consensus estimate either by earning more than expected or less.If the firm manages to beat the earnings estimate, it is called a positive or upside surprise. If the firm fails to reach the earnings estimate, it is called a negative surprise.
Here is how Amazon's performance, vis-à-vis surprises, has worked out over 2020-2021 YTD:
| 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% |
As with the earnings estimates themselves, earnings surprises affect stock prices. It’s been found that the stocks of firms with substantial positive earnings surprises tend to perform above average, and the stock prices with substantial negative earnings surprises perform below average.
As a result, companies often manage their earnings carefully to ensure that consensus estimates are not missed. Companies that consistently beat earnings estimates outperform the market. So some companies set expectations low by providing forward guidance that results in consensus estimates that are low relative to likely earnings. This results in the company consistently beating consensus estimates—and the earnings surprise becoming less and less surprising.
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- Corporate Finance Institute. "What is an Earnings Estimate?" Accessed Jun. 7, 2021.
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