Consensus Forecasts Consensus forecasts are the average analyst forecasts across major sell side and sometimes by side firms for a company. They're published by data aggregators and are usually available on a real-time basis. The firms provide live feeds to the data aggregators, so that changes in forecasts and target prices are reflected immediately in the consensus forecasts. Usually the main consensus data items which analysts focus on are revenue EBITDA and earnings per share. However, EBIT, dividend per share, net income, capex, and sometimes even debt numbers are used by analysts. The availability of consensus forecast for these line items does depend on which metrics the analysts have published on in their research notes. Note the consensus price targets and ratings are usually also available.

Consensus forecasts are usually available for the next three forecast years and for companies that report results quarterly consensus numbers are usually available for at least the next four quarters.

The consensus numbers can be provided on a mean or median basis, but there's usually a requirement for three covering analysts on a stock for consensus data to be published. Therefore consensus forecasts might not be available for certain small or mid-cap stocks. The reason that consensus forecasts are so important is that they can be viewed as a proxy for the markets expectations since it gives us the average view across a number of different analysts. If we really believe that the market and consensus expectations are aligned individual analysts can benchmark their own forecasts against the market. This helps us to understand what the market is pricing in and whether this supports their target price and recommendation. For example, if an analyst notes that their revenue, EBIT and earnings per share forecasts are above consensus then if the analyst also has a target price above the current share price this benchmarking supports the analyst conclusions the analyst must therefore have reason to believe that revenue and earnings growth are going to be ahead of what the market is expecting which justifies a higher valuation.

In this workout, we've been given some extracts from an analyst model and we've been given the revenue, EBIT, and EPS forecast for the next three years. We've also been given the consensus numbers for those line items and the next three years and we've been asked to provide comments or highlight any concerns that we might have when comparing the analysts forecasts with consensus. So if we were this analyst we could use these consensus numbers to benchmark and compare our own forecast numbers. So the first thing that I'm going to do is to compare the analyst figures to consensus for each line item and each year. So I'll take the analyst numbers. Divide by consensus minus 1 and that gives me the percentage difference between the analyst and consensus. I can now copy that down.

And I've got that calculation of all three line items and then I can copy right? And I have those calculations for all three forecast years as well. So now let's analyze these numbers. Now the first thing to note is that the analyst is slightly ahead of consensus for all three line items in all three years, but The variance increases as we go down the income statement for revenue really it's only a very modest difference to consensus, that increases for EBIT and there's quite a significant jump between EBIT and EPS and also and the difference does increase as we go across the forecast years. Now, I would have two concerns with this the first thing is that the analyst usually has the greatest conviction that they differ to the market in the short to medium term. So it's quite unusual that such a significant jump between the analyst numbers and consensus in the third forecast year. Secondly, it's unusual that we have such a large jump in the difference between the analyst numbers and consensus when moving from EBIT to EPS effectively as you're moving down the income statement because this suggests that the analyst differs to consensus on the basis of financing course or tax, which is quite an unusual. To have an edge on so I would really question the appropriateness of their financing costs in their model. So hopefully you can see that by comparing to consensus, it can force the analyst to challenge the assumptions in their model and really helped them to identify where they differ to what the market is expecting.