Estimating EPS
March 5, 2009
[updated 11-4-09] By far, the most important judgment on the SSG is our estimate of the company’s EPS growth rate for the next five years. This estimated rate directly determines the High and Low EPS in dollars which are then used (in part) to determine the Forecast High and Low Prices. No other SSG judgment has such a major impact on the final result.
Our estimate of future Sales growth is only used as part of the Better Investing/NAIC Preferred Procedure which is one method for estimating EPS. I use another method and here’s how I estimate EPS for all my SSGs:
(1) I always check seven [up from six] long-term EPS estimates for every SSG I do, from:
- FactSet CallStreet via CNNMoney
- Thomson Reuters via Yahoo Finance
- Zacks.com
- Reuters.com
- FactSet via Morningstar.com [added 11-4-09]
- S&P (the only one I pay for which comes with SSG data)
- Value Line (from my library)
(2) These are all long-term EPS estimates. Reuters doesn’t say how long, VL is for 3-5 years, and the remaining five are for the next 5 years.
If anyone knows of other free estimates from different data sources (not simply different web sites), please let me know.
(3) Note that these estimates are from seven different data providers, not just seven different websites. It’s not always easy to tell, but I believe the following is accurate:
- Thomson Reuters (old Thomson/First Call and Thomson FN still to some) provides EPS estimates to CNBC, AOL, NASDAQ, and Yahoo Finance;
- Zacks Investment Research furnishes EPS estimates to SmartMoney.com, MSN MoneyCentral, StockSelector.com, ClearStation.com, and Zacks.com.
Thus, it’s not very helpful to check several websites when the EPS estimate is provided by the same source. It is very helpful, I think, to check different data sources for their EPS estimates.
(4) Morningstar used to get its EPS estimates from Reuters.com, but recently switched to FactSet which makes different estimates than FactStreet CallStreet and the other analysts. [added 11-4-09]
(5) Two of the seven estimates, from FactSet CallStreet via CNNMoney and Reuters.com, provide more info than the other estimates which only provide the consensus estimate. In addition to the consensus, the two also provide the number of contributing analysts and the high and low estimate. The extra info provides helpful context and I put less weight on estimates that are made by only a few analysts. The high and low estimates are also useful to indicate whether those analysts are in close agreement or far apart.
(6) FactSet CallStreet via CNNMoney, Reuters.com and Zacks via ClearStation.com are the only free EPS estimates I know of that also provide the number of analysts as well as the high and low estimates.
(7) Hemscott/Morningstar, the provider of SSG data at StockCentral.com, makes no EPS estimate. On the other hand, Better Investing.org provides SSG data from S&P which does include an EPS estimate for the next 5 years.
Both StockCentral and BetterInvesting are subscription sites, and you can find a link to them, their rates, and free trials on my “Favorite Links” page which is at the top of this Blog.
(8) We don’t know the names of the analysts that make these EPS estimates and therefore can’t determine the extent of overlap among the seven that I routinely check. However, we DO know that the these estimates are far from identical:
- For example, VL’s estimate for Cognizant Technology on 2-20-09 was 28.50%, S&P was 25.00%, Zacks.com was 23.50%, Reuters.com was 21.43%, FactSet CallStreet via CNNMoney was 20.00%, and Thomson Reuters via YahooFinance was 18.40%. Here VL was the highest estimate and the spread was a whopping 10%;
- Cardinal Health (CAH) is another example, but where VL was low: VL was currently 8.50% on 2-24, Thomson Reuters via Yahoo Finance was 11.08%, Zacks.com was 11.25%, Reuters.com was 12.11%, and S&P as well as FactSet CallStreet via CNN Money were 14.00%;
- EMC is still another example where VL was neither low nor high: on 1-5, Thompson Reuters via YahooFinance was low at 11.20%, S&P and VL were 12.50%, Reuters.com was 12.60%, Zacks.com was 12.90%, and FactSet CallStreet was high as 14.00%.
(9) After collecting all seven estimates, there are several ways to utilize the data:
- Excel can easily calculate the average and the average less one Standard Deviation. That, in my judgment, results in a reasonably conservative estimate and adequately “wrings-out” over-optimism. If you want to be tougher, you could reduce the average by two Standard Deviations although I think that is usually too tough as this is not rocket science;
- Also, any odd-ball estimate could be treated as an outlier and eliminated from the average. And, the lowest estimate of the five (or six) could turn out to be more reasonable than the average less one (or two) SDs;
- You could also compare the average and the lowest estimate to your own EPS estimate, especially one from BI/NAIC’s Preferred Procedure which involves making four other estimates for the next 5 years: Sales growth, Pre-Tax Profit Margin, Tax Rate, and Shares Outstanding. I stopped using the PP because, for me, it involves too many uniformed estimates and too much guesswork. See:
Determining What’s Reasonable and What’s Not: An Update (probing the PP of CTSH)
Considering Kohl’s (KSS) and Reconsidering NAIC’s Preferred Procedure
(10) There are several reasons why I check all seven EPS estimates:
- I learn which are out-of-whack and which are in the ball park;
- I learn what is conservative and what is optimistic; and
- I have some rational basis for what seems reasonable and what’s not.
Moreover, when I do my SSGs, I don’t have to rely on my gut feelings or some ambiguous sense of sleeping well. I sleep better knowing that I have tried to be reasonable by doing my homework.
Armin
Hello!
Very Interesting post! Thank you for such interesting resource!
PS: Sorry for my bad english, I’v just started to learn this language
See you!
Your, Raiul Baztepo
Hi Raiul:
Your English is plenty good and you are welcome to visit my blog anytime.
Armin
Hello !!! ^_^
My name is Piter Kokoniz. oOnly want to tell, that your blog is really cool
And want to ask you: will you continue to post in this blog in future?
Sorry for my bad english:)
Thank you:)
Your Piter
Hi Piter:
Your English is plenty good and you are welcome to visit my blog anytime.
If you’re serious about using the SSG to invest in growth stocks, you need to start using the SSG. You might try to redo one of my recent SSG posts and see if you can duplicate each number.
Armin
Armin,
I found Yahoo.Finance rates the analyst and rates how the analyst did on a particular stock. For those stocks that don’t receive a lot of coverage this might be a better way to look at the eps guess. Those large stocks that have extensive coverage then using excel sounds to be fruitful. Have you tracked how well the std dev method works? Also SmartMoney.com has free coverage on eps projections.
EPS is very important. How do you determine the PE to go with it?
Bob
Hey Bob:
Thanks for the comment.
- I saw no way to look at the EPS estimates of the analysts tracked by YahooFinance. I saw their names and ratings, but not their estimates. I could not even learn if these estimates were for the long term.
- As I pointed out, SmartMoney’s EPS estimates come from Zacks which I already review at Zacks.com. Checking the same data source at different websites doesn’t help, what does is checking different data sources.
- As you know, High PE x High EPS = High Price. For every SSG I do, I check to see that I don’t substantially exceed Value Line’s High Price estimate. If I do, I lower my High PE. For those stocks where VL doesn’t make a High Price estimate, I begin my SSG by using Toolkit’s Alt-M command which is usually the most conservative option.
Armin
Armin,
I’m having a lot of problems with the High PE x High EPS = High Price. My trouble is with High PE and the elements used to compute it. The High PE is computed by taking the year’s high price and dividing by that year’s eps. The problem is the full year’s eps was not known at the time the high price was used. The eps used was some future projection at the time of high price. If the projected earnings turned out to be higher than the actual eps then the computing the High PE using the lower number would result in PE that is too high and vice versus. A similar problem would occur for low PE.
Bob
Bob:
I already explained how I handle forecasting the High PE and can’t help you any further.
Here’s some large-scale guidance: my overall goal is to achieve a reasonably conservative SSG and I use comparisons all the time to guide me. Does that help at all?
You could ask the BI and/or the StockCentral Discussion Lists and you’ll find links to them on my Favorite Links page. If you ask, I suggest that you provide a concrete example rather than hypothetical generalizations.
Armin