Curious about broker forecasts? We’ll break down what you need to know.
What are broker forecasts?
Broker forecasts are estimates made by City analysts as to what a listed company will report in terms of future sales, profits, and dividends.
The average of all the latest forecasts made is often referred to as the consensus broker forecast.
Many investors pay close attention to broker forecasts when deciding how much a company’s shares might be worth, especially the rate of profit growth over the next year or two.
In addition, a broker might also label a company’s shares as Buy, Hold, or Sell, sometimes called broker ratings, and set a price target as to what they think the shares should be trading at.
How accurate are broker forecasts?
It’s sensible to take broker forecasts with a large pinch of salt.
While they can be useful in building an overall picture of a company’s prospects, they are just one piece of information to be considered.
The financial press tends to love broker forecasts and broker ratings as they provide easy copy for their articles and a clear action point for their readers. They also make excellent fodder for financial TV channels.
Usually, you will find that an individual analyst specialises in one industry sector, allowing them to build up a better understanding of the companies it contains over time.
But it’s important to realise that the analysts preparing these broker forecasts don’t work for the company concerned, so they rely heavily on information produced by management rather than any first-hand knowledge of what’s going on behind the scenes.
An analyst that has produced a forecast that’s significantly out of step with others may be given a steer by the company’s management team if their figures look either too pessimistic or optimistic.
Each company will have a house broker, who provides it with other related corporate financial services, and the forecasts produced by this firm are often the most accurate and up-to-date.
Smaller companies may only have one or two brokers covering them while the largest companies may have a dozen or more.
Broker forecasts are there to be beaten
There’s an elaborate game that goes on between listed companies and the firms that produce broker forecasts.
In short, companies that manage to beat the consensus broker forecast when they publish their results are often rewarded with a rise in their share price.
And the reverse is also true: a company’s share price might fall if profits turn out to be lower than the consensus broker forecast.
This means many companies attempt to gently steer broker forecasts over time, making it easier to beat them. In other words, they attempt “to under promise but over deliver”.
That said, if a UK-listed company thinks that its next set of results could be significantly different from the current broker forecasts in the market then it will usually issue a statement to that effect to make sure that investors aren’t being misled.
Significantly different in this context usually means plus or minus 10% in terms of profits but it’s not a hard or fast number.
How to read broker forecasts
We said earlier that City analysts often label a company’s shares as Buy, Hold, or Sell when they produce their broker forecasts.
These three ratings are straightforward enough, but financial folk love their investing jargon so you may see different ratings being used out in the wild.
Underweight vs. underweight
Less obvious are names like Overweight or Underweight. Here, the analyst is suggesting that investors should own the company concerned but their position size should be larger or smaller than the weighting the company has in the overall market.
Say Company A made up 5% of the UK market — an Underweight rating would imply an analyst thinks investors should only hold perhaps 2-4% of their portfolio in its shares.
Accumulate vs. reduce
Other ratings you might see are Accumulate, which typically translates into “we think this is a Buy but it’s pretty marginal”. Reduce is another term for a marginal sell while Avoid is akin to Strong Sell.
Market performer vs. underperformer
You might also see things like “Market performer” and “Market underperformer” meaning the analyst thinks the share price will move up and down in line with the market or slightly behind it.
Buy vs. sell
Finally, it’s worth noting that you tend to see far more Buy ratings than you do Sell ratings when it comes to broker forecasts.
In particular, it’s extremely rare for a house broker to label a company a Sell as it tends to lead to awkward conversations with the other departments working with the same company.
On a similar note, City firms are always looking for new clients, and having a Sell rating on a company tends not to be the best starting point when seeking its business!
Are broker price targets helpful?
In a word, we would say no.
Their appeal is largely their simplicity, e.g. “broker X thinks this company is worth 200p but its shares are currently trading at 150p”, but it is very unusual to know exactly how an analyst derives their price target for any given company.
Often they seem to be based on the average multiple of profits companies elsewhere in the sector are trading at, adjusted up or down depending on the perceived quality of the individual company. It’s all a bit finger in the air.
There is certainly no guarantee that any broker’s price target will be hit within any given period.
Where can you find broker forecasts?
Unfortunately, there seems to be less free information on broker forecasts available these days.
A few sites will cover broker ratings (i.e. Buy, Hold, Sell) and broker price targets, but it’s rare to see figures for expected sales, profits, and dividends (which tend to be more useful).
Such information can often be found on websites that charge a monthly or annual fee for company data. And some companies actually list broker forecasts or even broker research on the Investor Relations section of their websites.
There are also a few sites on the Internet that produce basic research notes on many listed companies. Bear in mind, though, that the companies covered often pay these sites a small fee to produce these reports so they are rarely very critical.
Broker forecasts are estimates provided by City analysts as to what a stock-market listed company may produce in future years relating to its sales, profits, and dividends. Broker forecasts for the next financial year to be reported are likely to be the most accurate but forecasts for years beyond that tend to become less and less reliable, given it’s next to impossible to predict what might happen to a company in future.
It’s hard to know what’s going on inside a company that you don’t work for, even if you have been studying the business it operates in for decades. So broker forecasts are probably best thought of as an educated guess. Brokers often rely on information provided by the company when preparing their forecasts so, in theory at least, they should be roughly in the right ballpark. Be aware that brokers may often only update their forecasts every few months so they may not incorporate any recent news that has been released.
A broker note is a piece of analyst research covering an individual company or industry sector. Sometimes they are just a few paragraphs covering a recent piece of news and providing a very quick comment on what it might mean. But broker notes can run to dozens of pages of in-depth analysis, particularly if the broker is covering the company in question for the first time (this is sometimes referred to as an initiation piece).