Analyst Forecasts: Sales and Profit Margins
53 Pages Posted: 1 Apr 2016 Last revised: 2 Nov 2017
Date Written: June 23, 2017
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: Suggested Citation