What it means
Listed companies report profits every quarter, and investors want to know whether those profits are better or worse than expected. Analysts at banks and brokerages publish forecasts of earnings per share (profit divided by the number of shares) for the companies they cover.
A data service gathers those forecasts and averages them, producing a number that people call the consensus. First Call began as a service that distributed analyst research and estimates electronically and became one of the best-known names in this field.
It was later absorbed into larger data businesses, but the name remains a shorthand in market commentary. Today several providers compile consensus estimates, and the numbers they publish can differ slightly depending on which analysts are included.
The consensus matters because share prices often react more to the surprise than to the result itself. A company that earns more than last year but less than the consensus can see its shares fall.
Another company that reports a smaller profit but beats a very low consensus can see its shares rise. Managers use the idea in several ways.
Investor relations teams track the consensus so they can guide analysts and avoid unpleasant surprises. Finance teams may also compare their internal forecasts with the consensus when planning communications, and boards sometimes link executive bonuses to meeting or beating earnings expectations.
There are caveats. Consensus figures can be stale if analysts have not updated them, they may mix different accounting bases, and they can nudge companies into managing earnings to hit the number.
Sensible readers treat the consensus as a useful reference and not as a verdict.
In practice
Real-world examples.
Example
A consumer goods company reports quarterly EPS of $1.15 against a consensus of $1.10. Its shares rise in early trading because the result beats the number analysts were expecting. The size of the beat, about 4.5%, is quoted in news reports the same morning.
Example
A software firm reports record sales but slightly lower profit than the consensus. Its stock falls 6% as investors focus on the shortfall and not on the growth. Commentators describe the move as a reaction to expectations, not to the underlying business.
Example
An investor relations director at a manufacturer reviews the consensus every week. When it drifts above the company's own forecast, she arranges a call with analysts to explain the cost pressures before results are released. She is careful to share only information that is already public or that the company's lawyers have cleared.
Formula
Calculation
The consensus is the average of the analysts' estimates, and the surprise measures how far the reported result is from it.
Consensus estimate = Sum of analyst estimates divided by Number of analysts
Earnings surprise (%) = (Actual EPS - Consensus EPS) divided by Consensus EPS x 100
Worked example: five analysts forecast earnings per share (EPS) of $2.00, $2.10, $2.20, $2.10 and $2.10.
Sum = $2.00 + $2.10 + $2.20 + $2.10 + $2.10 = $10.50
Consensus = $10.50 divided by 5 = $2.10
The company reports actual EPS of $2.31.
Surprise = ($2.31 - $2.10) divided by $2.10 = $0.21 divided by $2.10 = 0.10, or a 10% positive surprise.Case study
Seen in the real world.
Pinewood Instruments is a fictional listed maker of measuring equipment. Its consensus earnings estimate for the quarter was $0.80 per share, but the finance team's internal forecast was only $0.72 because of a supplier delay. If the company said nothing, the result would be a 10% miss.
In this illustrative case, the investor relations head arranged a call with analysts two weeks before the quarter ended and explained the delay in plain terms. Analysts lowered their estimates and the consensus moved to $0.73. When the company reported $0.74, the shares barely moved. The case shows how managing expectations can matter as much as managing results. It also shows that early, honest communication gives analysts time to adjust their models.
Watch out
Common mistakes.
- Assuming the consensus is an official forecast from the company. It is an average of independent analysts' views, and the company does not set it.
- Reading a beat or miss as proof of business quality. A company can beat a lowered consensus while its performance worsens, or miss a high one while performing well.
- Using a stale consensus. Analysts revise their numbers as new information arrives, so an old figure can mislead when judging a result.
Questions
People also ask.
Is First Call still an independent product today?
The name belongs to the history of consensus estimates, and the data now sits within larger market data businesses. Check with your provider for the current service name.
Why do different sources show different consensus numbers?
Providers include different sets of analysts, update at different times and may adjust for one-off items differently. For serious analysis, note which source you are using.
What is an earnings whisper number?
It is an unofficial expectation among traders that may be higher or lower than the published consensus. It matters because the market sometimes reacts to the whisper and not to the official number.
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