Earnings forecasts - It's hit and miss

A study of financial forecasting accuracy by management consultancy, Parson Consulting, shows that just 49 out of the FTSE 350 list of companies 14% matched analysts' earnings-per-share EPS forecasts in 2005, up three points from the previous year, but still way short of their US counterparts. Some 39% of S&P500 companies hit analysts' expectations plus or minus 1%, an increase from 34% in 2004.

Companies in other leading stock exchanges around the world performed even worse in this respect than those in the UK. Less than 10% of those in the SBF120 France, DAX100 Germany and HM Hong Kong matched analysts' expectations. However, the study also found UK-listed companies were most likely to over-perform against forecast when compared to their foreign counterparts.

Parson Consulting's annual study, 'Hits and Misses' compares analysts' forecasts of a company's EPS against actual company results. This year's study shows little improvement in EPS forecasting accuracy; 55% of the FTSE350 exceeded analysts' expectations for 2005 60% in 2004 with 19% 18% in 2004 exceeding expectations by more than 10%. Around a third 31% came in below expectations, the same figure for 2004.

Kevin Narain, regional managing director for Parson Consulting, makes the point that there appears to be a certain amount of 'sandbagging' is going on; namely some companies, particularly those in the UK, believe the market will view them favourably if they hold back good news and then report higher than expected results.

"But this is not necessarily so. Failing to communicate variances against expectation can just as easily result in the opposite of what was intended happening. Analysts need to be able to trust companies to communicate accurately and regularly, and variances in either direction undermine that trust," Narain adds.

The industry sector achieving the greatest EPS forecasting accuracy in 2005 was Basic Materials, followed by Transportation. The lowest achiever was Technology, followed by Financial Services.

Of the FTSE350 companies, 49 met analysts' consensus estimates /-1%, 50 under-performed by more than 10% and 68 over-performed by more than 10%.

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2006-10-27 14:53:38 © Moneyextra.com