Articate

Earnings forecasts are basically predictions about how much earnings (per share) a company is expected to make in future years. Analyst forecasts are essentially the same thing because they are the earnings predictions from investment banks and industry experts. This information can be easily accessed online and although the figures are only estimates, it can still be invaluable information for the average stock market trader and investor.

To give you an example, if a company has historically traded on a price/earnings ratio of between 12 and 14 on average and analyst forecasts suggest that the forward P/E ratio based on future earnings will be 10 and 8 for the next two years, then this would be a great investment. This is because the share price should move higher to reflect these significantly higher earnings.

Of course these earnings forecasts do not always turn out to be completely accurate. There may be times when lots of analysts’ earnings estimates are ahead of the current and previous years’ figures, but during the next few years the company ends up running into difficulties and issuing profit warnings, causing the share price to slump. However that’s the risk you take when you invest in the stock market.

On the whole it is worth paying attention to analyst forecasts because the figures produced are not just picked out of the air. They are based on a full understanding of the company in question and some thorough background research.

To be on the safe side it is generally best to look at the overall average of all analyst forecasts, rather than looking at just one or two earnings forecasts. Some will inevitably be higher or lower than others, so the average figure will give you the best estimate overall. If all the projections are higher than the latest set of figures, then this is obviously a very positive sign, particularly if the share price is currently oversold.

So where can you access these analyst/earnings forecasts online?

Well there are lots of websites that you can get this information. For UK stocks I personally like to use Digital Look because they have earnings forecasts for the next two or three years for all of the listed companies.

For example I’m currently looking at Tesco and they have earnings projections for the years ending 2011, 2012 and 2013. They tell me the earnings figures and the P/E ratios based on today’s price, as well as a lot of other data such as future revenue, profits, EPS growth and dividend yields. It really is very useful information.

For US stocks, which I also like to trade on occasions, I like to use the Yahoo Finance site. If you visit the site and enter the quote of a company you are interested in, you can click on ‘Analyst Estimates’ to see detailed forecasts for the next few years for any stock you want to research. This data is often based on the average figures from around 40-50 different analysts, so again it is really invaluable information.

Of course it should be pointed out that you shouldn’t buy or sell stocks based purely on analysts’ forecasts alone. You should also do your own research and form your own opinion. However they are a really good guide as to how well a company is likely to perform in future years and I would definitely suggest that you at least take a look at them before making any investment decisions.