What Is an Earnings Estimate?
Let me explain what an earnings estimate is: it's an analyst's prediction for a company's future quarterly or annual earnings per share, or EPS. You should know that these future earnings estimates are probably the most critical input when you're trying to value a firm. When analysts put estimates on a firm's earnings for specific periods like quarterly or annually, they can then apply cash flow analysis to figure out a fair value for the company, which leads to a target share price.
As an investor, you often depend on these earnings estimates to analyze various stocks and decide if you should buy or sell them. Simply put, an earnings estimate is an analyst's forecast for a public company's upcoming quarterly or annual EPS. You and other investors rely heavily on these to assess a company's performance and guide your investment decisions. Most of you use a consensus earnings estimate, which is a forecast based on the combined predictions of all equity analysts covering the stock. Keep in mind that if a company meets, beats, or misses its earnings estimates, it can affect the price of the stock, especially in the short term. Earnings surprises happen when a company earns more or less than expected compared to the consensus.
Understanding an Earnings Estimate
Analysts derive an EPS estimate using forecasting models, management guidance, and fundamental company information. You, as a market participant, rely a lot on these estimates to gauge how a company is performing. That's why whether a company meets, beats, or misses its estimates can influence the stock price, particularly right away.
These analysts' estimates are often gathered to form consensus estimates, which act as a benchmark for evaluating the company's performance. When you hear that a company has 'missed estimates' or 'beaten estimates,' it's typically referring to these consensus figures.
Companies like Refinitiv and Zacks Investment Research compile these estimates and calculate the average or consensus. You can find their forecasts in stock quotes or publications like The Wall Street Journal. Consensus numbers are also available on financial sites such as Yahoo! Finance, Bloomberg, Visible Alpha, Morningstar.com, and Google Finance.
Tip on Earnings Estimates
Here's a tip for you: published consensus earnings estimates are often already baked into a company's stock price. But they can sometimes backfire. Shares of companies with high earnings estimates tend to struggle if the performance doesn't match the market's high expectations—they disappoint easily. On the other hand, companies with low estimates often outperform because the bar is set low, leaving room only to go up.
Example of an Earnings Estimate
You can find earnings estimates by looking up individual stocks. Take Amazon (AMZN) as an example. Here's a summary of its consensus earnings estimates as of June 7, 2021.
Amazon Earnings Per Share Estimates
- Current Qtr. (Jun 2021): Avg. Estimate 12.27, Low 9.77, High 15.18, Year Ago EPS 10.3, No. of Analysts 36
- Next Qtr. (Sep 2021): Avg. Estimate 12.97, Low 6.84, High 17.7, Year Ago EPS 12.37, No. of Analysts 36
- Current Year (2021): Avg. Estimate 55.88, Low 42.68, High 71.13, Year Ago EPS 41.83, No. of Analysts 46
- Next Year (2022): Avg. Estimate 72.3, Low 45.11, High 96.53, Year Ago EPS 55.88, No. of Analysts 46
Special Considerations
Earnings surprises occur when a company misses the consensus by earning more or less than expected. If it beats the estimate, that's a positive or upside surprise. If it falls short, it's a negative surprise.
Let me show you how Amazon's performance with surprises played out from 2020 to 2021 year-to-date.
Amazon Earnings History
- 6/29/2020: EPS Est. 1.46, EPS Actual 10.3, Difference 8.84, Surprise % 605.50%
- 9/29/2020: EPS Est. 7.41, EPS Actual 12.37, Difference 4.96, Surprise % 66.90%
- 12/30/2020: EPS Est. 7.23, EPS Actual 14.09, Difference 6.86, Surprise % 94.90%
- 3/30/2021: EPS Est. 9.54, EPS Actual 15.79, Difference 6.25, Surprise % 65.50%
Impact of Earnings Surprises
Just like the estimates, earnings surprises affect stock prices. Studies show that stocks with big positive surprises tend to perform above average, while those with big negative surprises lag behind.
Because of this, companies manage their earnings carefully to avoid missing consensus estimates. Those that consistently beat estimates outperform the market. Some companies even set low expectations through forward guidance, leading to conservative consensus estimates. This way, they keep beating estimates, and the surprises become expected.
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