Brokers' Concensus Forecasts

At the bottom of the company entry there is a panel showing individual brokers' forecasts of pre-tax profits, EPS and DPS. These forecasts are used to calculate the consensus values for pre-tax profits, EPS and DPS.

The forecasts are listed in date order. There is only enough room for 16 of them so if there are more the oldest are not shown.

The date shows when each forecast was published or later revised. If the current forecast is an upgrade (or downgrade) of an earlier forecast, a plus (or minus) indicates the part of the forecast that has been changed.

When calculating the consensus, date-weighting is used to give more emphasis to recent forecasts.

Brokers' recommendations are indicated with abbreviations like LTB for long-term buy and TPR for take profits.

There is no consensus for recommendations as they are all made on different dates and at different ruling share prices.

Sometimes brokers' forecasts are excluded from the consensus for reasons like profit warnings (indicated by 'w'), age ('a'), structural changes in progress ('s') and the temporary disqualification of the broker who might be acting for the company on an acquisition or rights issue ('b'). If a results announcement has rendered a forecast obsolete it is flagged 'r'. Other anomalies are flagged 'd' for 'different basis'.

Just below the consensus forecast there are two lines showing the one-month change and the three-month change compared with earlier consensus forecasts.

In essence, REFS' aim is to provide a consensus which is date-weighted after excluding old forecasts and 'outlying forecasts' (ie those with a large deviation from the norm).

A number of points deserve special mention when studying details of brokers' consensus forecasts:-

1. The reliability of the consensus forecast (and therefore of the PEG) is considerably enhanced if there is a large number of brokers (say five or more) covering the company, and a small standard deviation from the average forecast. Watch out for the lemming effect, however. If a prestigious and top-notch broker makes a forecast for a company in an industry in which he is known to specialise, it is very tempting for an analyst working for a lesser firm to take a lead from the much more detailed research.
2. With many smaller companies (especially AIM stocks) there is often only one broker's forecast. Placing undue reliance on this clearly adds to the risk. A very keen eye should be kept on directors' dealings and the relative strength of these shares.
3. The company's own broker or brokers are highlighted in a panel above the Outlook statement. I pay special attention to the company broker's forecasts especially if the brokers in question are prestigious. The company broker should be better informed and is less likely to take the risk of embarrassing the company with over-optimistic forecasts.
4. The recency of brokers' forecasts is obviously of critical importance. I usually compare the last few forecasts with the consensus to see if there is a major discrepancy. Date-weighting will, of course, have taken this into effect in a more calculated way.
5. A keen eye should be kept on the one-month overall change, the three-month overall change and the number of pluses or minuses, as they all indicate if newsflow is becoming more positive, remaining neutral or beginning to turn negative.
6. An important caveat about the EPS figures is that the tax rate sometimes varies substantially. When a company is recovering from a loss-making position, after a year or so any tax losses brought forward are likely to be exhausted. At this point, the company begins to pay a full tax charge again and EPS are reduced accordingly. Even though profits before tax might be increasing by, say, 20% in the year ahead, this could be masked by the increased tax charge. It therefore pays to keep an eye on pre-tax profits figures as well as EPS and to double-check the historic and forecast tax rates, which are shown in the panel of seven-year figures.

There is always the risk that the brokers' consensus forecast will not be met. However, it would be impossible to calculate twelve month rolling ahead figures without a consensus forecast and it is preferable to invest with a little guidance from brokers rather than none at all. Provided a keen eye is always kept on newsflow, relative strength and directors' dealings, the risk of a major upset should be minimised. Bear in mind too that there is another more positive side to the coin ­ brokers' forecasts are frequently beaten by a wide margin. 

BROKER RECOMMENDATIONS
Each broker has an incremental range of recommendations, and the aggregated list, with abbreviations, is reproduced below.