What is a Consensus Estimate?
A consensus estimate is a figure based on the combined estimates of analysts covering a public company. Generally, analysts give a consensus for a company's earnings per share (EPS) and revenue; these figures are most often made for the quarter, fiscal year, and next fiscal year. The size of the company and the number of analysts covering it will dictate the size of the pool from which the estimate is derived.
Understanding Consensus Estimate
When you hear that a company has "missed estimates" or "beaten estimates," these are references to consensus estimates. Based on projections, models, sentiments and research, analysts strive to come up with an estimate of what the company will do in the future. Consensus estimates can be found in stock quotations or summaries in common places, such as the Wall Street Journal’s website, Bloomberg, Morningstar.com, and Google Finance, among other locations.
- Consensus estimates are estimates of revenues and earnings for a company by analysts covering a public company.
- They are not an exact science and depend on a variety of factors, from access to company records to previous financial statements and estimates of the market for the company's products.
Consensus Estimates and Market (In)Efficiencies
Consensus estimates, comprised of individual analyst assessments, are not an exact science. All reports rely not only on financial statements (i.e. the Statement of Financial Position or Balance Sheet; Statement of Comprehensive Income or Income Statement; Statement of Changes in Equity; and Statement of Cash Flows), which may be manipulated by management or other staff, with access to company records – they also involve inputs, such as footnotes, management commentary, research into the industry overall, peer companies, and macroeconomic analysis.
Analysts will often use inputs from the above data sources and place them into a Discounted Cash Flows model (DCF). The DCF is a method of valuation, which uses future free cash flow projections and discounts them, using a required annual rate, to arrive at a present value estimate. If the present value arrived at is higher than the current market price of the stock, an analyst may come in “above” consensus. In contrast, if the present value of future cash flows is lower than the price of the stock at the time of calculation – an analyst may conclude that the stock is priced “below” consensus.
All of this leads some pundits to believe that the market is not as efficient as often purported, and that the efficiency is driven by estimates about a multitude of future events that may not be accurate. This might help to explain why a company's stock quickly adjusts to the new information, provided by quarterly earnings and revenue numbers, when these figures diverge from the consensus estimate.
A 2013 study by consulting firm McKinsey found that missing consensus estimates does not have material effect on a company's share price. "In the near term, falling short of consensus earnings estimates is seldom catastrophic," the study's authors wrote. Their analysis found that missing the consensus by 1 percent leads to a share-price decrease of only two-tenths in the five day period after the announcement.
As an example, they pointed to Molson Coors Brewing Company (TAP), which beat consensus estimate by 2 percent in 2010 but its shares still declined by 7 percent because investors in the company presumed that the share decline was due to a tax break instead of an improvement in the company's fundamental strategy. But the study also cautioned against reading too much into the results. According to the study's authors, consensus estimates "hint" at investor concerns about a given company or sector.