How is it that companies always report within a penny or so of wall street prediction

Discussion in 'Economics' started by noob_trad3r, Apr 27, 2012.

  1. How is this possible. Analyst says Q3 EPS will be 48 cents. Company reports 49 cents.

    How can these analysts be so accurate?

    That would be like playing roulette and always getting the number or one off every time.

    Statistically something seems odd.
  2. Wow none of the experts here can answer this. I though this was elite trader.
  3. Firstly, "always" is a bit of an exaggeration. A recent earnings release from a certain large tech company comes to mind.

    Secondly, why can't analysts be that accurate? It's not like there's a lack of data. Moreover, I ain't an expert, but I imagine earnings exhibit a lot of autocorrelation, which should make things easier.
  4. Most companies provide guidance during their quarter reports, this gives analysts a ball park figure to use, precisely, as guidance as they gather their data and conduct their studies.
  5. Ask Jack Welch. If memory serves me he did pretty well laying out analysts "expectations".

    I looked it up:

    “During the heart of the Jack Welch era,” writes Martin, “GE met or beat analysts’ forecasts in forty-six of forty-eight quarters between December 31, 1989, and September 30, 2001—a 96 percent hit rate. Even more impressively, in forty-one of those forty-six quarters, GE hit the analyst forecast to the exact penny—89 percent perfection. And in the remaining seven imperfect quarters, the tolerance was startlingly narrow: four times GE beat the projection by 2 cents, once it beat it by 1 cent, once it missed by 1 cent, and once by 2 cents. Looking at these twelve years of unnatural precision, Jensen asks rhetorically: ‘What is the chance that could happen if earnings were not being “managed’?”’ Martin replies: infinitesimal.
  6. The companies tell the analysts what it's going to be minus a small % so that the company will look like they beat estimates. The analysts, knowing that the companies want to beat estimates, publish estimates some small % higher than what they're told. Then the company does their accounting such that they at least meet those estimates. It's a self-fulfilling prophecy.
  7. Analysts meet with the companies multiple times in a quarter (or at least in a year), so they have about as much information about the company as the company's own insiders do.

    Listen to companies' earnings calls and you will see that the top management of the companies is typically pretty chummy with the analysts who cover it. That's because they interact relatively frequently.
  8. piezoe


    That's a 20% error margin. Big company can usually offer guidance with less than 20% error. "Analyst" a.k.a. "(Manipul)yst" has no problem getting within 20% when they want to, or going high or low when they want to create a miss.

    When a company is tight-lipped and silent on guidance, (Manipu)lyst can easily miss big time. It's all a game designed to feed pablum to CNBC and transfer money from you to Wall Street. (Exception: small independent analyst shops.)

    (Manipu)lyst's are people who trade their integrity for a paycheck.
  9. Analyst are always moving their numbers though. I wouldnt say its like roulette...I would say its like blackjack, but the analysts are changing their bets depending on what the first card is dealt.
  10. Accounting "gimmickry" plays no small part. Granted, most of it is allowed, but over the past decade or so, most of the investing community has become cynical enough to just accept it as part of the status quo.
    #10     Apr 27, 2012