‘Estimates’ or ‘Guesstimates’ ?

Jayant Pai | jayant@ppfas.com

Every quarter, sell-side analysts embark on an activity which I find perplexing….making and disseminating ‘Earnings Estimates’. Every brokerage house, releases such estimates for many large-cap companies (and a few small companies). There are a couple of points which are common across all quarters:

1. Clustering: It is remarkable that there is hardly any difference in the estimates which are made prior to the results, irrespective of whether it is a globally reputed brokerage house or a hole-in-the-wall broking outfit. My guess is that the larger ones base their estimates on the figures given out by the managements during ‘closed-door’ meetings, as well as the periodic ‘guidance’ given by them. The smaller ones simply piggyback on the larger brokers’ estimates and pass them off as their own. In either case, there is not much of analysis involved.

2. Variance: Often there is a significant variance between the estimates and the actual figures. Sometimes, even the direction of the actual results is not the same as that estimated. So much so, that in the USA, there is an indicator known as the “Earnings Surprise Indicator” which measures the variance of the variance. Confused….Well, you are not the only one.

To me, the whole exercise is quite absurd. I mean, in most firms each analyst tracks three to four sectors. Now, each of these will have a couple of humungous companies / conglomerates involved in a diverse range of activities. Given the number of moving parts, I think even the managements of these companies know that it is futile to indulge in quarterly predictions. However, the analyst at the brokerage house (who is often a multitasker and not an industry specialist) apparently can do what the top management of the company dare not, i.e. give precise predictions.

I also wonder who really tracks and believes these estimates. Seasoned investors may not even look at them as they have proved to be wrong on too many occasions. Maybe the media is more keen on knowing these numbers more than anyone else.

I am happy to see that some companies are desisting from providing quarterly guidance, as they believe that this practice encourages short-termism. If this trend gathers momentum, then, maybe, analysts will have to begin analysing and not merely reporting….

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