In this article, you will learn what is the meaning of a consensus estimate. Consensus is, essentially, the average of earnings estimates made by professionals. You may notice that occasionally articles in the financial press refer to earnings estimates. Publishing earnings estimates is one of the functions of analysts, whose job is to research stocks.
What Is the Meaning of a Consensus Estimate?
A consensus estimate is a forecast of a public company's projected earnings based on the combined estimates of all equity analysts that cover the stock.
Generally, analysts predict a company's earnings per share (EPS) and revenue numbers for the quarter, fiscal year (FY), and future FYs. The size of the company and the number of analysts covering it will dictate the size of the pool from which The consensus estimate is derived.
When you hear that a company has "missed estimates" or "beaten estimates," it's usually in reference to consensus estimates.
Analysts strive to come up with an estimate of what companies will do in the future, based on projections, models, subjective evaluations, market sentiment, and empirical research. Consensus estimates, comprised of several individual analyst assessments, are often more of an art in many ways than an exact science. Each analyst's research relies not only on financial statements (ie a company's balance sheet, income statement, or statement of cash flows), but also on their individual subjective inputs into the analysis and subsequent interpretations of the
These estimates 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. If a company misses or exceeds consensus estimates, it may send the price of a stock tumbling or soaring, respectively.
Why is Consensus Estimate Important?
A company beating Consensus estimates does not *guarantee* that their stock will go up. There are times when a company will beat the Consensus earnings estimates, but its stock goes down.
That may be because the Consensus estimate may not be a “true” reflection of the actual expectations of all market participants. Analyst estimates can be stale, so what's listed as Consensus may be higher (or lower) than it should be.
Moreover, a company may beat quarterly Consensus and its stock go down because of forward-looking comments that miss expectations. While one should pay close attention to quarterly earnings reports, Consensus is also applicable to a longer-term, investor-oriented mindset.
Bottom Line
Whether you decide to undertake short-term trades or invest with a long-term mindset, Consensus is a useful framework for understanding stock price dynamics. This article is about what is the meaning of a consensus estimate.
