This might sound really stupid questions but i really need to know those to get a better sense of ER
how do analysts generally predict earnings revenues? by comparing with past performance?peers in the industry? any financial models?!!
given this difficult time, what are some challenges facing equity research analysts?? how would equity research analysts gather information?
please please help out!!
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They base their estimates off a variety of factors including: management expectations, economic conditions, industry outlook, overall company strength, and yes, historic performance(more as a gut check, does this company consistently outperforms their peers? Have they been able to historically maintain a X% EBITDA Margin). Models are absolutely used. Generally speaking, the above mentioned factors influence revenue growth. They also make assumptions for earning based on an EBITDA margin which includes factors such as energy costs, pricing power, margin pressure, competitive landscape, etc...
The biggest challenge is uncertain economic conditions, especially now. Its near impossible to accurately forecast how much you're going to pay for breakfast tomorrow morning, much less how much a company will earn 2 years from now.
They gather information from investor relations conference calls, discussions with management where applicable, research from other organizations (IMF, WorldBank, EU, FED, trade groups and organizations).
From trends, gut feelings about industries, random guess works, hints from the adjacent industries/supply chains, etc. It's more art than science. Oh, and sanity check at the end is absolutely required.
The biggest challenge is when a company's stock moved against its fundamentals, i.e., the company is doing poorly but stock shooting up. Either due to the change in market expectations or just due to general market trends. Forecasting numbers are the relatively simple part as you could run some simple scenarios/monte carlo to gauge the comfort level of your recommendation.
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