Why Do Some Analysts Go Rogue?
Senior management teams are very thoughtful about the financial guidance they provide the Street. Internal and external factors are considered and result in ranges that reflect the management team’s best estimates at the time they are provided. Given the amount of brainpower that goes into crafting the guidance, management teams often become frustrated when their analysts go “rogue” by publishing estimates outside of the guidance range. As a former analyst, I can tell you this happens for a variety of reasons.
The primary reason analysts go rogue is because they have a more bullish or bearish view of your business trends or the industry dynamics than you baked into your forecast. There is certainly no malice intended in these instances, they just have a different view of the prospects for your business based on their analysis. Analysts generally consider themselves subject matter experts in your industry and follow all of your peers, so they likely feel they are bringing additional knowledge to the table when offering their estimates. They consider these questions:
- Does the growth implied in your guidance align with your industry’s growth?
- Do industry trends suggest a different fundamental backdrop?
- Has any of their independent due diligence implied stronger or weaker results?
At times, your analysts may base their forecasts more on industry trends and their diligence than your guidance.
Alternatively, an analyst might make estimates outside of guidance simply to take a contrarian view that attracts interest and attention from the buy side. They fear they might become lost in the noise if they are the 15th analyst to initiate on a company with a buy rating and in-line estimates. Going rouge provides analysts an opportunity to differentiate themselves from the crowd and potentially capture mind share on the buy side.
How do you protect your company from the rogue analyst?
Some companies just offer directional guidance and don’t provide an actual range, but the best way to protect your company when offering guidance is to give the Street a range for each metric provided. The more detail you provide, the better your analysts will understand your expectations for the business. With detail, analysts are more likely to grasp your assumptions about the business and model your company appropriately.
Also be sure to provide enough metrics with your guidance so analysts can understand what you want them to know. At a minimum, you should give data on projected revenue, but if you really want your consensus estimates to match your projected income statement, then consider providing guidance on other things like profit margins, profitability, earnings per share (EPS) or earnings before interest, taxes, depreciation and amortization (EBITDA).
The impact of a rogue analyst
If you’ve followed all of this advice and you still have some rogue analysts, here’s how to evaluate the impact it might have and what you should do. Part of the answer is: it depends on how much the rogue analyst affects your consensus estimates. If you have 15 analysts, with just one outside your guidance range, then the law of averages says that repercussions are probably not very severe. But if you only have five analysts and one goes outside the range — that could really drive up your consensus estimates, and move the average beyond a level that you are comfortable you can achieve.
Unfortunately, no matter how frustrating it is to have a rogue analyst, there is not a lot you can do to make them change their estimates. Analysts are truly independent and take a lot of care preparing their estimates. In addition, within the context of Regulation Fair Disclosure (Reg FD) you can’t provide analysts with any information you have not broadly disseminated.
Regardless of the number of rogue analysts you have, your main focus should be to run your business. The name of the game is meeting or beating, not missing the guidance you provided. To do that, you have to stay focused on the job at hand.
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Asher Dewhurst is a Managing Director on ICR Westwicke's healthcare services and healthcare technology teams. He has extensive experience in equity research with a focus on all aspects of healthcare services. He has a BS in finance from the Warrington College of Business at the University of Florida.
Tags: analysts, consensus estimate
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