Consensus Estimate - Explained
What is a Consensus Estimate?
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Table of ContentsWhat is a Consensus Estimate?How Does a Consensus Estimate Work?Consensus Estimates and Market (In)Efficiencies
What is a Consensus Estimate?
A consensus estimate is an estimate of a company based on the aggregate estimates of analysts about the stocks of securities of a firm. When analysts give estimates of a company's earnings per share sales and revenue, either quarterly or annually, and a consensus is reached, a consensus estimate is realized. The size of a firm, the number of analysts involved, and the figures given by the analysts determine the consensus estimate that will be given. A consensus estimate is derived from different analysts' estimates about a company. It is otherwise called a consensus rating that might be published or not.
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How Does a Consensus Estimate Work?
Securities analysts look into the stock and security performance of a public company so as to give an estimate of what is likely to happen in the company in the future. The combined estimates of these analysts, using sales, revenues, earnings per share and other metrics gives a consensus estimate. 'Missed estimates' and 'beaten estimates' 11are terms associated with consensus estimates. Consensus estimates can be published and contained in stock quotations or summaries of journals and others.
Consensus Estimates and Market (In)Efficiencies
Consensus estimates are opinions, figures and shares predictions about a company's performance by securities analysts. Given that these estimates are not derived from data sources that cannot change, consensus estimates can be affected by inefficiencies in the market place. For instance, the financial statements, balance sheets, income statements, statement of cash flows, statement of changes in equities and other reports through which analysts make their estimates can be manipulated by the management of the company or deliberately misreported. In addition to financial statements, analysts draw inputs from data sources and put them in a discounted cash flow model (DCF) to give a consensus estimate. As given by analysts, a stock can either be priced "above" or "below" the consensus. Market (in)efficiencies and consensus estimates are intertwined in the sense that when estimates are driven by market inefficiencies, they are inaccurate. Also, the estimates given by analysts are capable of causing significant changes in the prices of the stock as stocks are known to adjust to new information in the marketplace.