by Tajinder Dhillon.
Analyst estimates are a key input into the investment decision-making process, as they summarize analyst expectations about a company’s earnings report. The StarMine SmartEstimate adds value by providing a more concise view of consensus by overweighting more timely estimates and giving greater weight to more-accurate analysts. Comparing the SmartEstimate to consensus leads to a “Predicted Surprise.” Research shows that when the Predicted Surprise is greater than 2% or less than -2%, the signal successfully predicts the direction of the actual surprise with a success rate of about 70% across regions, market caps, sectors and financial measures. To see this in action, please click here to view the 2019 Europe Earnings Prediction Results where we scored 10/10.
During times of extreme uncertainty, companies are less likely to provide guidance as seen during COVID-19, which can lead to ‘stale’ estimates in the I/B/E/S consensus. Thus, paying attention to the SmartEstimate can give investors greater insight as it will capture the most recent information from the more accurate analysts.
In this example, we look at German retailer Zalando (ZALG.DE), which shows a strong positive Predicted Surprise as shown in Exhibit 1. The SmartEstimate is €0.50 vs. a mean of €0.46, resulting in a 10.25% Predicted Surprise. We also see that there has been a significant increase in analyst estimates over the last 30 days, with the average revision being 199.86% and the mean estimate increasing by 54.19%, resulting in a stock price increase of 6.32%.
Exhibit 1: Zalando Predicted Surprise for FY1 EPS
To see a breakdown of how the SmartEstimate is calculated, we turn to Exhibit 2, which shows the individual analyst estimates. The first data-cleansing analytic is to automatically exclude stale estimates from the SmartEstimate, which is denoted by X-Age. Estimates older than 120 days will have this marker displayed.
Secondly, an X-Cluster occurs when the majority of analysts revise their estimates in a short time window. As a result, any analyst who did not revise his or her estimate during this window will be removed from the SmartEstimate until they submit a new estimate. The reason for the X-cluster is to recognize a material event has likely caused most analysts to revise their estimates and the SmartEstimate is designed to capture the most recent information.
All remaining analysts who have passed the X-Age and X-Cluster criteria will be included in the SmartEstimate.
Analysts receive a weight based on their “Earnings Accuracy,” which is displayed through a 1 to 5-star ranking system. 5-star analysts represent the most accurate analysts and will receive a higher weight in the SmartEstimate. Finally, the SmartEstimate will be calculated as a weighted average of all analysts included in the SmartEstimate. As a final reminder, the SmartEstimate is then compared to the mean estimate, which is a simple average of all analysts regardless of how old the estimate is, which leads to the Predicted Surprise %.
Exhibit 2: Zalando SmartEstimate Calculation
The detailed estimates page lets customers sort the data by clicking on any of the columns displayed. Users can also click on the PDF icon beside an estimate to see the broker note (require entitlements) or view the analyst scorecard which shows all the companies covered by an analyst.
The green arrow beside the “current estimate” indicates that most analysts have raised their estimates when compared to the “previous estimate” column.
Exhibit 3 provides a graphic view of how the SmartEstimate has moved over time and is customizable to show additional lines, including the median, high/low estimate range, and stock price. The SmartEstimate in gold started to diverge from the mean estimate in purple during June 2020. We can see that the mean estimate has slowly increased since then and often plays catch-up to the SmartEstimate. Investors who can spot the divergence between the SmartEstimate and mean estimate will benefit as the SmartEstimate is a leading indicator and predictive of future analyst revisions.
Exhibit 3: Zalando Stock Price vs. SmartEstimate
Zalando is expected to report 20Q2 earnings on August 11. The current EPS Predicted Surprise is 28.26% which indicates that the company is likely to beat analyst expectations when reporting.
For customers looking to access this content in Refinitiv Eikon, please visit the “detailed estimates” page under “Estimates.” To learn more about StarMine, please click here.