Advantages of a stock forecast

Analysts of stocks must forecast growth and revenue growth in order to estimate what their expected earnings would be. Forecasted revenue and growth projections are important components of security analysis, and often lead to the stock’s value in the future. In the case of an enterprise has a rapid rate of growth over a number of times, it can be able to command multiples that surpass the market’s current multiple. If its forward multiple rises then its stock price will be able to increase accordingly, which will result in a greater return to investors. For forward projections, there are many inputs; some come from quantitative data , while others have more of a subjective nature. The accuracy and reliability of the data determine the forecasts.

Forecasting Revenue

Growth and revenue models are more reliable if the inputs used to determine the figures are as exact as is possible. To forecast revenue, analysts collect data from companies, the industry, and consumers. Typically, both companies and trade associations of industry release information about the future size of the market, as well as the number of competitors, and current market share. These data are available in annual reports as well as through industry associations. The data collected from consumer survey, UPC bar codes, as well as similar outlets paint an image of the current and expected demand.

Other inputs are required to specifically model a company’s revenue forecasts. Financial statements, for instance the balance sheet, inform analysts about a company’s current inventory and changes in inventory levels from one year to the next. In many cases, companies also provide periodic updates on their inventory levels, shipments and the anticipated number of units sold over the current time.

Average price-per-unit can be calculated by using the revenues reported in the income statements divided by the inventory change (or number of units that were sold). For past transactions you can find these figures in the US company’s Securities and Exchange Commission (SEC) reports, but regarding future transactions assumptions must be made, such as the impact of competition on pricing power and anticipated demand versus supply.

In competitive markets, prices usually fall by either directly via price cuts , or indirectly through rebates. Competition comes in the form of products that are similar to those offered by different manufacturers, or new product lines that enter the market and cannibalizing older ones. When demand exceeds supply firms typically push products on the market to consumers, typically resulting in lower prices. Forecasted revenue is calculated by making use of the average selling price (ASP) for the next period and then multiplying it by the anticipated number of units sold. These calculated forecasts can be “confirmed” by company management who might discuss revenue and their expectations for growth in conference calls, which are usually held around the time of the release of the most recent quarterly or annual report. Furthermore, management of the company can be involved in events within the same period, such as industry conferences, where they release new information about inventory as well as market competitiveness and pricing to support or confirm in developing revenue models.

Forecasting Growth

Once the amount of revenue is established then future growth can be modeled. The use of a growth rate for revenue can help determine the future growth of earnings. Deciding on the right growth rate should be dependent on the expectations of product price and future unit sales. Penetration into new and existing markets as well as the capability to steal market share will have an impact on the future sales of units. Industry outlook, analysis of main product features and demand are integral components to forecasting growth rates.

Impact of Forecasts on Valuation

The ultimate goal of analysts in forecasting growth and revenue should be to establish the right price for a share. After modeling expected revenue, and concluding that the costs will remain at the same percentage of revenues analysts are able to calculate the expected earnings for each period.

With these models, analysts can then analyze the growth in earnings and revenue growth to determine whether the company is able to manage costs and boost revenue growth down to its bottom line.

The stock forecast growth rate

The growth rate change will be evident in the value multiple that the market will pay for the stock. Stocks that have sustainable or increasing growth rates will be given more multiples. Conversely, stocks that have negative growth will be assigned lower multiples. For ABC, increased growth from Year 1 to Year 2. This will result in an increase in the multiple, while low growth of Year 4 (actually negative growth in earnings when compared with revenue growth) will be reflected in a lower.

The Bottom Line

Forecasts of analysts are essential in setting the expectations for stock prices which, in turn, lead to recommendations. Without the ability to make precise forecasts, the decision to purchase or sell a share cannot be made. Though stock forecasts require gathering of numerous quantitative data points gathered from different sources as well as subjective determinations analysts must be able to build an approximate model to provide recommendations.