A year after a devastating earthquake, followed by a powerful and destructive tsunami, wreaked havoc on one of Japan’s main islands, it is possible to look back at how well various methodologies fared when it came to calculating the impact of the twin disasters on corporate earnings results – and the StarMine SmartEstimate proved particularly helpful in determining the direction of futures earnings estimate revisions.
The Tohoku earthquake, as it is now known, measured 9 on the Richter scale; its location off the coast of Japan caused tsunami waves as high as 133 feet in places and reaching as far inland as six miles. Together, the two catastrophes cost nearly 16,000 lives and wreaked havoc on Japan’s basic infrastructure, from power generation to transportation; the fate of another 3,300 people remains unknown. In addition to the heartbreak and tragedy, there is the economic cost, which the World Bank estimated to be $235 billion – making it the most expensive natural disaster on record.
Not surprisingly, the Tohoku quake and its aftermath delivered a jolt to Japanese corporations, their earnings forecasts and financial markets. It is at times like this that being able to gauge which analysts’ forecasts are the most timely and most likely to be proven accurate by later events is vital for the investment community. During market shocks, removing stale data is essential, as is ensuring that estimates being used to calculate an aggregate forecast are those that most rapidly take into account the impact of a disaster such as the Tohoku quake.
There is a broad perception that in the wake of the quake and tsunami, sell-side analysts were slow to cut their earnings estimates. As a result, I/B/E/S consensus estimates remained relatively high for prolonged periods of time after the quake. In contrast, the SmartEstimate offered users significant information beyond what they could have derived from the I/B/E/S figure or any other consensus estimate. Since the SmartEstimate differentially weights analyst estimates in favor of those issued most recently by those analysts with the best historic track records for accuracy, they are more likely to capture the “early warning” signals of more widespread changes in earnings estimates.
Sony Corporation Estimate Revisions
Indeed, as is detailed in the attached report, the ability of the SmartEstimate to give investors early and accurate insight into the trends in estimate revisions held true not only in the time period immediately surrounding the earnings release date (the time period when Japanese companies traditionally provide future earnings guidance) but over longer time periods as well. (Please refer to the report for further details.)
At times when markets are hit by some kind of across-the-board shock that forces companies of all kinds to reshape their short- and medium term business plans, it becomes particularly important for investors to access a model that is more responsive and that is weighted to reflect the significance of analysts who have earned a reputation for their ability to grasp what is happening and reflect it in their research more rapidly than their peers. The StarMine SmartEstimate was tested by events in Japan, and has proven its ability to deliver.
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