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We have a TV on financial news in the office, and I always see reports of companies meeting their earnings estimates or failing to meet them. Even if a company misses the estimate by a very small percentage is is reported as "Company XX misses earnings!!" and their stock tends to go down.

I understand that actual earnings can't be manipulated to look better, but if an estimate is by definition not a set-in-stone accurate number why don't companies sandbag on their published estimates so they are more likely to beat them?

I guess the heart of the question is what checks are in place to make a company provide a realistic estimate? Why not generate an internal estimate and then report your target is 80% of that? Seems like beating your estimates by 20% would make you look great.

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    A lot of times they're referring to a sort of 3rd party analyst consensus earnings estimate, not necessarily an estimate set by the company. – quid Apr 21 '16 at 19:23
  • @quid and the 3rd party analysts rely on guidance from the company to create the estimates. So either the guidance will be bad creating lower estimates the company still has to meet, or the guidance will be too good creating higher estimates the company still has to meet. Either event will result in lower share prices either sooner or later. – CQM Apr 21 '16 at 21:38
  • @CQM Not all companies issue guidance. Apple famously never did, Tim Cook recently broke that tradition and started issuing guidance and estimates. The third part analysts rely on whatever information is available including, but not limited to, company issued guidance. – quid Apr 21 '16 at 21:52
  • This is my first question here but I'm not new to SE at all. Why the down votes? Is this not a good topic for the site? To broad or opinion based? – JPhi1618 Apr 22 '16 at 3:24
  • There's indirect evidence that they do understate: if estimates were made honestly, you'd expect companies to beat the estimate about half the time, and fall short about half the time. In practice, it's closer to 80% beat/20% short. – Mark Apr 22 '16 at 23:45
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Stating poor estimates in advance will lower your share price to compensate for thge extras boost it gets later ... And may run afoul of stock manipulation laws. More pain than gain likely.

  • Hey @keshlam. Good to see you over here - you really get around! Thanks for the input. – JPhi1618 Apr 21 '16 at 19:25
  • +1 The company would just be increasing their stock price volatility, which I don't think they want to do. – Craig W Apr 22 '16 at 16:54
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You need to distinguish a company's guidance from analysts' estimates.

A company will give a revenue/earnings guidance which is generally based on internal budgets. The guidance may be aggressive or conservative - some managements are known to be conservative and the market will take that into account to form actual estimates.

When you see a headline saying that a company missed, it is generally by reference to the analysts' estimates. Analysts use a company's guidance as one data point among many others to form a forecast of revenue/earnings. The idea behind those headlines is that the average sales/earnings estimates of analysts is a good approximation of what the market expects (which is debatable).

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