The behavioral economics of earnings estimates
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Tom Brakke has a great explanation of how and why earnings estimates move, based on a hypothetical analyst who wants to up his estimate to $1.65 while the consensus ranges from $1.22 to $1.35.
Often what is easy to do in a situation like this is to think, “You know, if I use $1.45, I would be well above the high range. I’d still get credit for being right. There’s no sense being too aggressive on this.” And so begins a game of behavioral leapfrog. The other analysts covering the company will immediately notice the new number and think that they too should take another look. They will be asked questions about the estimate you published. Their reviews may discover some of the same improvements that you spotted, and their estimates will move higher, sometimes by a little and sometimes by a lot. Someone who can see that same $1.65 potential as you did will decide to top you with $1.50 or $1.55.
This can go on for quite awhile.
The lesson here is not to pay much attention to forward p/e ratios, since the denominator in such ratios is the consensus earnings estimate, and the consensus earnings estimate is a moving target which pretty much by definition is behind the curve.
And of course this also helps explain why “whisper numbers” are so much more important than official consensus earnings estimates — the estimates don’t necessarily reflect what the analysts really think.