Earnings per Share Estimates

Companies understand how important earnings are to the market as well as shareholders. They often publish what are called earnings calendars, which is the date a company will report out their most recent financial performance. They also conduct conference calls to discuss changes in their company's outlook that might affect future earnings.

When researching a stock for investment purposes, there are several different types of reports or estimates:

• Analyst Estimates

• Earnings Surprises

• Consensus Trends

• Growth Rates

Analyst Estimates

Large companies often have several market analysts that follow their operations closely enough to be able to develop earnings estimates. These estimates are usually quoted in terms of an average of all the analysts' predictions. Analysts usually publish estimates for the most recent quarter, the next quarter, the current fiscal year, and the next fiscal year.

Information that typically accompanies these estimates includes:

• Number of Analysts: allows the investor to understand how many analysts provided estimates that were subsequently used to produce the average.

• High / Low Estimate: gives the investor a good feel for the range of earnings estimates. Generally, the closer the high and low estimate, the more confidence in the value.

Earnings Surprises

The earnings surprise is a historical look at estimates versus the actual earnings in a given accounting period. This information is usually stated on a quarterly basis, and includes four or five quarter's worth of data.

The earnings surprise tells the investor how close the analysts came to predicting the actual earnings. When a company earns more than predicted, that's usually good news for a stock in terms of its price. A positive earnings surprise can make a stock's price increase.

On the other hand, a lot of negative surprises can mean a company has problems the analysts don't completely understand. That's usually not a good sign, and requires further investigation before buying stock in a company.

Consensus Trend

The consensus EPS trend allows the investor to understand the recent direction of earnings estimates. The trend shows the investor how the estimates have been changing as new information is published by the company. Trends are usually shown for 90 days, 60 days, 30 days, and 7 days.

If the earnings estimates are declining over time, this is usually a signal that new information made an analyst revise their forecast downward. Generally, an investor wants to see values that remain steady or move in a positive direction.

Earnings Growth Rate

Published earnings growth rates normally include the last five years, the current fiscal year, the next fiscal year, and the expected growth rate for the next five years. The information for each company is usually compared to an overall market index, such as the S&P 500, and the industry in which the company competes. The earnings growth rate over the next five years is an important measure for investors planning to hold onto a stock for several years. The company's earnings will usually have a direct relationship to the price of the company's stock.

Growth Rate Example

For example, if Sam is trying to predict what her shares of Coca Cola might be worth in five years, she'd want to understand what the earnings for Coca Cola might be in five years. She can develop this estimate herself using the five year earnings information along with the stock's price to earnings ratio, or P/E ratio.

By multiplying the future earnings per share by the current P/E ratio, she can develop an estimate of the stock's price in year 5.

That's a relatively simple approach to making future stock price estimates based on earnings. A broader discussion of ratios and their usefulness appears in our article: Understanding Financial Ratios.