Tajinder Dhillon
September 20, 2022

Product Insights: How StarMine Analyst Revision Model Reacts to Rapid Change in Analyst Sentiment

by Tajinder Dhillon.

On September 15th, FedEx Corp (FDX.N) delivered a shockwave announcement highlighting an accelerated slowdown in global demand which resulted in the company withdrawing its 22Q2 quarterly guidance.

This Product Insight looks back at how the StarMine Analyst Revision Model (ARM) provided a rapid signal to users, informing them of a significant change in analyst sentiment.

ARM is a stock ranking model that is designed to predict future changes in analyst sentiment by looking at changes in estimates across EPS, EBITDA, Revenue, and Recommendations over multiple time periods.

Exhibit 1 highlights an ARM score of 35 for FedEx Corp (FDX.N) on September 16th, which is a percentile rank vs. regional peers.  All StarMine model scores are ranked from 1 (bearish) through 100 (bullish) and a model score of 50 denotes a neutral signal.

Fast forward to the next business day (September 19th), the ARM model score for FedEx Corp updated to a rank of 1.

Exhibit 1: Responsiveness of ARM Model to changes in Analyst Sentiment

ARM score on September 16th, 2022

ARM score on September 19th, 2022


Source: Refinitiv Workspace

In Exhibit 1, ARM has four components as previously described: EPS, EBITDA, Revenue, and changes in Recommendations along with individual scores for each component providing further transparency.

Refinitiv Workspace for Analysts and Portfolio Managers users can access ARM by going to the ‘Estimates’ tab on a company page and clicking on Analyst Revision Model.

After viewing the model summary widget, users can scroll further down to see a visual display of how estimates have trended over time across all four components (Exhibit 2).  Analysts reacted to the announcement by adjusted their forecasts and we see a blended EPS mean change of -35.1% for the upcoming quarter (-20.0% for FY 2023, and -14.0% for FY 2024).  The blended mean change incorporates five lookback periods of 7d, 14d, 30d, 60d, and 90d.

For each measure, there is also a Predicted Surprise (PS) column, which compares the StarMine SmartEstimate (gold line) vs. Mean estimate (blue line).  A PS greater than 2% or less than -2% is deemed significant as our research shows that StarMine will accurately predict the direction of the earnings surprise 70% of the time.

FedEx will report earnings on September 22nd and has a current quarter PS of -16.5%.  Note that the gold line is lower than the blue line in every graph below, indicating that the SmartEstimate (explained below) is predicting further estimates from analysts to be lowered.

Exhibit 2: FedEx ARM Model

Source: Refinitiv Workspace

The StarMine SmartEstimate is a quantitative analytic which is used as an input to many of the StarMine models.  The SmartEstimate places a greater weight on higher ranked analysts who are more accurate and timelier.  Said differently, the SmartEstimate is viewed as a refined ‘consensus’ number and acts as a leading indicator compared to the traditional consensus mean estimate.

Exhibit 3 highlights the Predicted Surprise of -13.6% ($2.89 SmartEstimate vs. $3.35 Mean).  Refinitiv Workspace users can find the Detailed Estimates page by going to the Estimates tab on a company overview page.  The widget also highlights that over the last 30 days, 20 of the 24 estimates are ‘new’ and that the consensus mean estimate has been revised down by 39.1% over the same period.

Exhibit 3: 22Q2 SmartEstimate for FedEx Corp


Source: Refinitiv Workspace

The Detailed Estimates page also provides a list of all analyst estimates for the chosen measure and period which provides further insight (Exhibit 4).  Here we can see the ‘Earnings Accuracy’ for each analyst, which is a 1-5 Star Ranking based on a normal distribution – only 10% of analysts are able to achieve a 5-star ranking.

The data can be sorted by any column and in this example, is sorted by SmartEstimate Weight which highlights how the SmartEstimate is weighted by analyst.

The StarMine SmartEstimate also incorporates other data cleansing measures such as removing old estimates from the SmartEstimate (noted as X-Age) in addition to removing estimates who are not a part of a revisions cluster (noted as X-Cluster).

A revision cluster is automatically created when a majority of analysts change their forecast within a short timeframe.  In Exhibit 4, we see that all but four estimates were updated over a 48-hour window which formed a revision cluster.  As a result, the four estimates that have yet to revise their forecast are temporarily removed from the SmartEstimate until a new estimate is received.

Another feature of the SmartEstimate is to inform users when a 5-star analyst makes a large change in their forecast which is at least 5% different vs. the consensus mean estimate.  This is called a ‘Bold Estimate’ which is highlighted either green (positive Bold Estimate) or red (negative Bold Estimate).  Bold Estimates are valuable as a 5-star analyst is much more likely to remain a 5-star analyst into the future.

We observe two negative bold estimates below who both have an EPS estimate of $2.75 (consensus is $3.35) which may be a signal of a larger miss than anticipated at the time of reporting.

Exhibit 4: SmartEstimate for FedEx Corp

Source: Refinitiv Workspace

Finally, we can use the ‘Peers’ app to determine if the negative outlook from FedEx Corp has spilled into other companies.  Exhibit 5 highlights various StarMine Model scores including StarMine Combined Alpha Model, Price Momentum, Relative Value, SmartHoldings, and Combined Credit Risk.

Peers have seen share prices decline as noted by the Price Momentum column in addition to negative analyst sentiment for most peers.  Looking at the ARM Change column, this highlights the 30-day change in ARM score (-64 for FedEx Corp) and analysts have yet to make any immediate changes of significance to the rest of the sector.

After FedEx Corp seeing shares decline by approximately 20% after the announcement, it has a high Relative Value score of 83 indicating that is ‘cheap’ on a relative basis using six fundamental ratios.  Combined Credit Risk assesses the likelihood that a company will experience a default on its debt or bankruptcy over a 12-month time horizon.

Exhibit 5: FedEx Peers

Source: Refinitiv Workspace

As we head into 22Q3 earnings season, much attention will be focused on earnings outlook and whether companies will start to signal weakness in demand and/or profit margins.

In conclusion, this example showcases how StarMine ARM is a rapid signaling model which incorporates real-time data from our I/B/E/S database and adds a layer of value by providing a SmartEstimate which provides a more up-to-date estimate during times of extreme uncertainty.  ARM can be incorporated into any workflow on both the desktop and excel add-in which allows users to easily track model score changes for a portfolio or list of securities.

Previous Product Insights

 

 

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