Analyst Forecasts: Sales and Profit Margins

Equity analysts forecast sales (S) in addition to eps. We study the two components of eps forecasts, PM and S where PM=eps/S by definition. We use I/B/E/S data and focus on 12 months forecasts. Well-established prior research in analyst forecasts (AF) motivates the three initial issues in our study: the potential upward AF bias, the relative accuracy of AF compared to benchmark models, and the sub-optimality of AF. For these questions one can hypothesize that the two components produce similar results, much like eps. We question whether results related to S are different from results related to PM. Our main findings show (i) the upward bias of PM exceeds that of S, (ii) eps forecast errors depend more on the uncertainty in PM than that in S and (iii) reported S has greater impact on forecast revisions than reported PM. Related to (iii), results show that AF errors of S correlate positively with subsequent changes (growth) in S; PM forecast errors, by contrast, show no such correlation. We also show existence of AF sub-optimality, especially when firms are small.