Analyst Forecasts: Sales and Profit Margins

53 Pages Posted: 1 Apr 2016 Last revised: 2 Nov 2017

See all articles by C.S. Agnes Cheng

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance

K.C. Kenneth Chu

Hong Kong Polytechnic University - School of Accounting and Finance

James A. Ohlson

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: June 23, 2017

Abstract

Equity analysts forecast sales (S) in addition to eps. We study one year ahead analyst forecasts (AF) of the two eps components, PM and S, where PM=shares-outstanding*EPS/S. We assess the extent to which 4 properties associated with AF of eps apply to both S and PM: (i) upward bias of AF (ii) the superior accuracy of AF compared to benchmark models, (iii), the sub-optimality of AF, and, (iv), a positive serial correlation in AF errors. In most regards S and PM have similar properties, but PM forecasts have more of an upward bias and are less efficient than S. Additional analyses go beyond (i) - (iv) to focus on two aspects where S and PM differ materially. First, AF errors of eps depend much more on PM uncertainty than S uncertainty. Second, AF errors of S correlate positively with subsequent changes in AF of S; i.e., the subsequent S- growth will more likely be positive (negative) when the “news is good” (“bad”). PM forecast errors, in sharp contrast, do not correlate materially with subsequent changes in AF of PM. Throughout, the analyses control for size and results show that its effects on S and PM trends tend to be similar.

Keywords: Analyst forecasts

JEL Classification: G17

Suggested Citation

Cheng, C.S. Agnes and Chu, Kenneth and Ohlson, James A., Analyst Forecasts: Sales and Profit Margins (June 23, 2017). Available at SSRN: https://ssrn.com/abstract=2757562 or http://dx.doi.org/10.2139/ssrn.2757562

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

Kenneth Chu

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M1059, Li Ka Shing Tower
Hung Hom, Kowloon
Hong Kong, Hong Kong 000000
Hong Kong

James A. Ohlson (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon
China

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