The Consensus on Consensus Estimates

Another earnings season begins as investor relations and finance leaders across the public company landscape brace themselves and start to prepare for another month of fun. One of the key preparations that IROs are going to be kicking their earnings process off with is examining their consensus estimates as numbers come into focus and guidance planning and strategy starts coming to the forefront.

Consensus is the leading measure that connects to stock valuation, but, for IR practitioners, the world of consensus estimates can be confusing, frustrating, and overwhelming. The process of ensuring consensus estimates are fair and representative is arduous, with complex inconsistencies in numbers that must be managed properly. The stakes are high, because consensus is universally accepted by the Street and financial media, meaning consensus may be the most important measure that drives a stock’s reaction at earnings. Despite that importance, there’s no single standard. The combination of multiple sources of consensus and inconsistencies among various analysts’ estimates puts the pressure on the company to monitor and manage it. Mistakes can and do lead to massive, unwarranted stock volatility. This piece is meant to help educate on how to manage the process to the best possible outcome.

Let's first explore the source of these consensus numbers. There are three key providers - Bloomberg, FactSet, and Visible Alpha. All three do the same thing but there are several key differences among them. Bloomberg is very important to investors and traders since its terminals are used across Wall Street. FactSet has made a push over the past decade to have their consensus be the most widely accepted and used and it is commonly cited by the financial media as the primary source. And Visible Alpha is valued by the sell-side analyst community and commonly cited in their research notes. If you ask different Wall Streeters what they rely on – and we have – you’ll hear all three, though FactSet tends to lead.

All three also have differences when it comes to how they build their consensus numbers as well - for instance, they can have:

• Different methods of collecting the analyst estimate data – some are updated straight from the connected model, some from an analyst-submitted model, and some from research notes.
• Different speeds of collection, levels of inclusion, and preciseness in updating – some are fast, some slow and some are more complete or accurate than others.
• Different exclusionary methods – providers have different guidelines that they follow to exclude estimates in the cases of incorrect calculations, outliers from the mean, or outdated and stale estimates, as well as with KPI (Key Performance Indicator) inclusions, meaning metrics you won’t find on a P&L or balance sheet.
• Different providers used by different analysts – at times this is dependent on the analyst preference or on the contracts that brokerage/research firms have with each provider.
• Different levels of access – some providers cost more than others and some companies or analysts have access to only 1 or 2 or all 3.

For all these reasons, the consensus can vary from provider to provider - sometimes meaningfully - which can cause a litany of inconsistencies within your analyst group, your perceived quarterly performance, as well as your forward looking guidance and forecasting strategy. This can lead to one analyst using one number from one provider as their consensus comparison, and another potentially using a different consensus number from a different provider - setting up two different perspectives on how your company performed in the quarter or guided into the future versus consensus. These numbers being misaligned with the company and its internal expectations can lead to being caught off guard at earnings reporting time.

So, you may be asking - how can a company stay on top of this sausage-making?  Unfortunately, it is constant work and focus, but here are a few basics to help ease the workload:

• Analysts – proactively reach out to your analysts and get their latest models after each quarter or estimate update and make sure that the numbers they have are being calculated correctly.
• Consensus providers – reach out to each consensus provider and make sure that they are providing the right estimates and KPIs and are accurately updating each consensus number after every quarter and analyst update; be proactive in pointing out discrepancies.
• Model of models – keep an internal consensus model (or use an outsourced service like Virtua) so that you can stay on top of the right numbers and have the correct consensus numbers to be able to compare to and point the providers to if need be.

Now let's say you are just setting out on your public company journey or you are already public and these numbers have gotten away from you. There are a few ways to get ahead of it or to catch back up:

• Get ahead of it – make sure your analysts and the consensus providers are aware of your KPIs and how they are calculated. This can either be out of the gate during the IPO teach-in process or spending time with them when you are introducing new metrics to ensure that all those estimates are being pulled into the consensus providers accurately. A key tip here is to make sure that you understand what analysts are using which providers and how those providers collect and exclude estimates from analysts to make sure that the information is flowing smoothly and correctly between the two parties.
• Play catch up – if you are already behind or there are already discrepancies, perform a full audit of your consensus numbers across all the providers and get them aligned with your internal model as best as possible to help avoid discrepancies going forward. This should include working closely with each provider and making sure that all the estimates are up to date, accurate, aligned with each analyst model, that outliers are being excluded, and that the consensus number is complete and being calculated correctly. It may even make sense to get on the phone with your analysts and walk them through the KPIs as a refresh as well as to pick their brain on what consensus providers they are using and how they are getting their numbers updated on those. The more you know the better off you will be.

Once you have a handle on your consensus across each provider it will make the update process a lot easier as you should only have to worry about double checking for accuracy against the analyst models. The rest should take care of itself through the providers - assuming they are doing their jobs correctly that is.

I would note however that even after all this work, it may still be unavoidable to get these consensus numbers completely aligned for the litany of reasons that we laid out earlier. But making sure that you are aware of each number and prepared with all the information, should allow you to make informed decisions and set expectations appropriately even when discrepancies across providers exist.

Overall, the consensus on consensus is that there really isn’t one. Keeping your consensus estimates in order is one of the more tedious and thankless IR jobs, but being proactive in managing it is paramount in the IR world. If these numbers are not aligned with the company and their expectations, you are risking a major blow to its credibility as well as major value loss and share price volatility. So, the consensus on consensus in the IR world is - be proactive, be prepared, and stay on top of it.