An analyst’s estimates are arguably the most important inputs when attempting to value a company. Investment managers rely heavily on estimates to evaluate company performance, and as informational needs and technology advances, estimates data has evolved to be more detailed and accessible.
Analysts create estimates using earnings models with information gathered from corporate access events, company filings, channel checks and other sources. These individual estimates are then aggregated by third party data providers to create consensus estimates.
How do consensus estimates fit into an investor’s workflow?
Buy-side analysts develop their own view on a company based on research and then compare their view with the consensus opinion. The difference between their own view and consensus creates a potential investment opportunity. Many investors rely on consensus data to inform their positions. For example, Warren Buffett invests in companies where expectations (and valuation) are low.
There are several major sources for estimates data used by Wall Street, and Institutional Broker’s Estimate System (I/B/E/S) was one of the first to emerge as a major player in providing estimates data at a large scale. I/B/E/S launched in 1976 by New York brokerage firm Lynch, Jones & Ryan and Technimetrics, Inc. and collected historical estimates to help analysts determine investment opportunities. Initially, I/B/E/S started by compiling and determining yearly earnings estimates before expanding to quarterly. Quarterly estimates are now standard, and many analysts update their quarterly estimates multiple times each quarter.
Since I/B/E/S, other companies have emerged to provide institutional investors with consensus estimates. Most of these services provide consensus estimates on basic line items available within income statements, such as revenue, operating income, net income and earnings per share. However, because these companies don’t have access to the raw working models analysts create, they don’t have consensus for many other key drivers, are missing key sources and longer-term estimates, or are not careful with GAAP and non-GAAP distinctions.
While analysts have been operating for years with basic line items, there are now services available that offer much more. For example, Visible Alpha Insights offers consensus data on practically every line item within an income statement, balance sheet and cash flow statement, as well as other industry-specific and company-specific line items.
Do detailed estimates matter?
In general, investors and analysts alike believe that having more detail is beneficial to really understand a company. No one wants to go into an idea blind or not have access to the same information that others do. When your job is to explore every angle of a company, it’s much better to have all the information you could possibly want or need than to not have it.
With a product like Visible Alpha Insights, buy-side analysts and portfolio managers can access consensus on every item between revenue and earnings per share, offering a more comprehensive view on how a company is performing. For example, earnings may be projected to increase, but is it because sales on a particular product are expected to increase, or is it because the company is cutting costs? Each scenario provides a different trajectory for earnings, as the former is a more sustainable driver of earnings growth. Both matter in how you expect the company to perform in the future.
How do you think estimates data will continue to evolve?