Using consensus to better manage expectations

Do consensus estimates accurately reflect operating performance?



We are pleased to share an interesting article from IR Society Conference 2023: DYNAMIC IR – STAYING AUTHENTIC & MANAGING ON-GOING STRUCTURAL CHANGE

Analyst models certainly have a relevant impact on market sentiment and on investors’ perceptions of a company. Given the vast range of invesments opportunities, institutional investors often rely on sellside research,

How consensus manages the expectations of the investment community

For IROs, maintaining an ongoing and constructive relationships with investment banking and independent research analysts is critical. The aggregation of analysts’ models, provides a quantifiable market perspective of the company, offering insights for IR teams on how the investment community views the company.

No other source is as broad and deep for detailed analysis

The market’s view of a company’s business drivers

Traditional consensus metrics mostly focus on outcomes like revenue, net income, and earnings per share (EPS). In addition, cash flow and debt-related KPIs are even more relevant.

Then, a detailed examination of the analysts’ models and the detailed forecasts contained in them, however, unveils a comprehensive understanding of how analysts believe those outcomes will be achieved. The resulting data reveals the driving forces behind the business, providing an invaluable market perspective that a company and its IR team can use in the future. Analyst model forecasts significantly influence market sentiment and shape investors’ perceptions of a company. Given the vast array of investible opportunities, institutional investors often rely heavily on sellside research.

A broad spread of forecasts on a key business driver could signal the need for more transparency or improved guidance on the part of the company to clarify a point of confusion, or could reflect significant differences in analyst opinions on a fundamental issue. This information enables IR teams to proactively address concerns with specific analysts and to quantify any investment controversies that may drive investor behaviour.

The importance of timely responses

For an IR team, accurately tracking critical changes in key forecasts can be a herculean task, considering the ever-increasing size and complexity of analyst models and the frequency of revisions.

Beyond earnings: an ongoing process

According to a Visible Alpha study, while a significant percentage of analyst revisions (32%) occur within a day of an earnings announcement, the flow of information from analysts continues during the rest of the quarter. Almost 50% of analyst revisions are made between two weeks after earnings and two weeks before the next reporting. This study underscores the substantial value for IR teams in keeping a constant finger on the pulse of ongoing analyst updates.

Real-time consumption of sell-side models and forecasts provides an invaluable tool for staying ahead of the curve. Outdated snapshots of analyst sentiment, or high-level forecasts that do not illuminate the market’s changing view of their company’s key drivers, cannot serve the interests of IR teams in a constantly evolving information landscape.

Having timely access to comprehensive sell-side analyst models, forecasts, and market consensus can equip IR teams with invaluable insights. These insights may not only inform internal business strategy, but also foster effective external communications with analysts and investors.

For investor relations, managing expectations through the strategic use of consensus can offer a robust competitive advantage, fostering stronger relationships and facilitating more informed decision-making.

Do consensus estimates accurately reflect operating performance?

Executives and investors use analysts’ consensus estimates to determine the value of companies. Nevertheless, forecasts don’t always correctly reflect operating performance.

Source: Mckinsey capabilities / strategy and corporate-finance

What is a Consensus Estimate?

A consensus estimate is an estimate of a company based on the aggregate estimates of analysts about the stocks of securities of a firm. When analysts give estimates of a company’s earnings per share sales and revenue, either quarterly or annually, and a consensus is reached, a consensus estimate is realized. The size of a firm, the number of analysts involved, and the figures given by the analysts determine the consensus estimate that will be given. 

Source The Business Professor

“The consensus is just the mean summary statistic and arithmetic point of various numbers and this can be the least interesting part. Knowing the range of views can be more useful.”