One-Upped by the Street? How Bullish Company Forecasts are Taken to New Heights by Analysts

August 18, 2021

With the Q2 earnings season wrapped up, the numbers look, well, great. The Street might not be surprised, given that a few months ago, consensus estimates exceeded revenue guidance 75% of the time and earning per share guidance 80% of the time. Even though corporate leaders were hesitant to project strong numbers back in June, the Street believed they would perform. And perform they did: 75% of companies reported Q2 EPS results that beat both guidance and consensus estimates, and by significant margins.

Companies are updating their guidance accordingly. But so is the Street.

Perhaps as a result, over the past three months, the proportion of companies increasing EPS and revenue guidance is 62% and 57% respectively. However, the Street is upping its numbers, too, increasing 67% of EPS and 70% of revenue estimates.

So, the percentage of companies where guidance currently exceeds consensus estimates hasn’t increased by much. For the most part, the Street is continuing to call for better performance than companies are willing to commit to, but the gap has remained largely the same for the last two reporting periods. If the trend continues, and the Street is on the money, as it clearly was this past quarter, we could see another earnings season with similar results.

Still, headwinds exist that could spell trouble.

You can’t argue with the numbers. But the coast is in no way clear. Despite many executives (and analysts) calling for continued growth, challenges remain. And more companies are speaking up about them.

Compared to the first months of the previous two earnings seasons (January and April), a greater proportion of companies referenced supply chain disruptions in their July earnings calls. By early August, 95% of reporting companies had talked about COVID in one respect or another (up from 80% in Q1). However, only 28% of companies mentioned the Delta variant specifically. As global news on this new threat continues to build, that number will likely rise.

Is it real growth, or just recovery?

One reason for the strong performance in spite of lingering challenges could be that companies are recovering from the crux of the pandemic. If they lost ground in 2020, then strong 2021 performance could be reflecting recovery and getting back to normal as opposed to real new growth. For example, pre-COVID, companies were projecting year-over-year growth in the range of 7% for both earnings and revenues. Currently, they are projecting full-year earnings growth of over 17% and revenue growth of 15%, while the Street is forecasting 25% EPS growth and 13% revenue growth.

For companies that experienced declines in 2020, the 2021 projections are stronger than for those companies that reported gains during the pandemic. But even the companies that grew last year are calling for a continued strong performance with a median projection of 12% EPS growth.

The outsized numbers could also be a sign that companies have risen to the challenges and found ways to remediate operational and supply chain challenges. It could signal that companies have used the crisis to become leaner and more productive out of necessity, and they are now reaping the rewards of their efforts.

Whatever the cause, it would appear that things are headed in the right direction. The question now becomes whether or not companies have the ability to continue to sustain such impressive gains long-term. If companies and the Street are, in reality, mispresenting recovery as growth, the markets could be heading for a major correction, and sooner than later.

Keep telling your story, in as much detail as possible.

The remainder of 2021 will be a dynamic time as companies continue to capitalize on opportunities and navigate challenges. Regardless of your company’s specific Q2 results and projections for the rest of the year, continue to overcommunicate with your investors and the Street. Give the details – both good and bad. You can never go wrong with straightforward, transparent investor communications. And as always, contact us to help ensure your narrative is telling exactly what it needs to tell.

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