Analysts Cut Earnings Forecasts, Embarassingly Late

Mid-year profit warnings in northern Europe have -footed equity analysts who forecast strong earnings a global economic slowdown — the latest embarrassment a profession whose own value many investors question.

Thomson Reuters data average analysts' forecasts for earnings growth Germany, Netherlands, Switzerland, Sweden, Norway and Belgium were broadly stable, or even raised, the first half of the year.

Yet in that there was no shortage of evidence of global slowdown, China and the struggling euro states of southern Europe business sentiment surveys even from the of Germany. Sure enough, among the mid-year updates from companies, a raft of profit warnings disappointed investors who the advice of bullish analysts and have seen share drop.

Many analysts are revising estimates downwards, but some clients the damage is . Many see it as undermining — again — the entire case brokers employing research analysts at and question their objectivity. Analysts themselves say, — and many fund managers agree - that the value of work is far confined to profit and share price forecasts.

They do not lack critics, : "They're not very valuable," said fund manager Michael MacPhee Baillie Gifford.

"Human are incredibly bad forecasting anything," he said, adding that he and colleagues rarely saw any point even speaking to analysts investment banks.

For some, forecasting has little more credibility aimlessly throwing at a board. Unsurprisingly, Peter Steiner, analyst at BHF-Bank in Frankfurt, disagrees. His forecasting has a clear empirical , he says.

Like most of counterparts, he constructs computer models of the businesses covers. These formulae-filled spreadsheets attempt capture the variables, such commodity prices and interest , which determine a company's profits. Steiner constantly updates the variables the model to reflect changing circumstances, refining his forecasts.

Critics, however, say many analysts seem actually more influenced by and winks from investor relations departments — to analysts usually send their research notes before publishing — than the answers thrown out by their models.

The narrow deviation analysts forecasts around the average or consensus level often seen as proof of this, and the result can be that forecasts fail to get of market data as analysts wait for managers to tell them of the on their businesses of economic trends visible earlier.

Recent experience may show the problems of relying too much what companies say.

Steiner and his peers were out by a newspaper interview on July 8 in which Olaf Koch, Chief Executive of German supermarket giant Metro AG, indicated the euro crisis would hit profits harder than expected.

In with other analysts, Steiner then cut his price target following interview, to 29 euros share from 36 euros. However, by that , the share price had already fallen over 5 percent around 20 euros a share.

Had the analysts foreseen weakening of profits, which a reading of economic data Metro's European markets might helped predict, then they might have cut forecasts a week earlier and their clients could netted big profits.

Similarly, analysts were surprised June 26, when German chipmaker Infineon lowered its sales and margin outlook, less two months after it raised its sales outlook.

And the same day, steelmaker Salzgitter said profits would fall sharply this year. Just six weeks earlier, on May 15, the German firm said it expected stable profit in 2012.


Adapted and abridged from: CNBC, July 13, 2012.