What Are Analyst Ratings and Estimates?

By: Sean Ryan, CFA

Analyst estimates and ratings represent analysts’ expectations of how a company (and its’ stock) will perform in the future.

When we say “estimates,” we are usually talking about earnings estimates – an educated guess about how much money a company will earn in the next quarter or year. This is usually expressed on a “per share” basis. That is, if a company has 1,000 shares of stock outstanding, and an analyst expects the company to earn $3,000 next year, he will express his estimate as $3.00 per share (the $3,000 of earnings divided by the 1,000 shares outstanding).

Analyst ratings reflect how they think a company’s stock will perform in the future (usually over the next 12 months). The most common ratings are “buy” (the analyst thinks the stock will go up), “sell” (the analyst thinks the stock will go down), and “hold” (the analyst doesn’t have a strong opinion either way). Some analysts also use additional ratings such as “strong buy” when they are particularly confident in their forecasts.

Analysts arrive at their estimates and ratings by doing things like talking to company managements, a company’s customers and suppliers, evaluating relevant economic data, and using all of these things as the basis for making their forecasts.

While analysts have (hopefully) done all this homework, though, it is important to remember that their educated guesses remain just that – guesses. Sometimes they make mistakes, or overlook an important piece of information, or sometimes something unpredictable happens to cause their guesses to be wrong.

The bottom line: analyst estimates and ratings can be useful inputs into investment decisions, but should always be taken with a grain of salt.

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