FOR IMMEDIATE RELEASE
April 2, 1998
Contact:
Bruce D. Brooks
404/651-2645
Georgia State professor predicts earnings surprises for nation's largest companies
ATLANTA -- AT&T, American Express, Chevron, Coca-Cola and Disney are among the "Dow 30" stocks that can expect to report earnings that will exceed analysts' expectations for the next quarter, according to Dr. Lawrence Brown, Controllers RoundTable Research Professor at Georgia State University in the College of Business Administration. These stocks have received Brown's highest "1" ranking based upon his model that predicts earnings surprises for company stocks. Called Earnings Surprise Predictor, or (ESPTM), the model predicts "earnings surprises," defined as the difference between reported earnings and analysts' expectations of those earnings.
The model, developed by Brown for I/B/E/S International Inc., provides money managers and investors with an indication of how well a company's stock will perform. Those companies receiving the lowest rankings in Brown's latest predictions ("4"), meaning they are most likely to disappoint investors, are Boeing, Hewlett Packard and McDonald's.
"When a firm reports earnings which exceed analysts' expectations, stock prices typically go up," Brown said. "In contrast, when a firm reports earnings which fall short of analysts' expectations, stock prices typically drop. Investors generally prefer to own stocks in companies expected to report 'good news' earnings, those which will exceed analysts' expectations," he said. "Similarly, they generally wish to avoid owning stocks in companies expected to report 'bad news' earnings, those which will fall short of analysts' expectations.
"Utilizing my knowledge of how analysts formulate their earnings forecasts, I considered a variety of factors in building the Earnings Surprise Predictor (ESPTM) model, including the firm's past 'earnings surprises,' its past stock price movements, its price to earnings ratio, its market capitalization, its past earnings growth rate, its book-to-market ratio, and the industry to which it belongs," Brown said. Page 2
The model provides a percentile ranking from 99 to 1, where a 99 indicates that the firm is most likely to report "good news" earnings, and a 1 suggests that the firm is most likely to report "bad news" earnings. The 99 percentiles are also placed into five groups, where, similar to The Value Line Investment Survey, rank "1" stocks are most attractive and rank "5" stocks are least attractive.
Rank 1 stocks are those most likely to report earnings which will exceed analysts' expectations; rank 5 stocks are those most likely to report earnings which will fall short of analysts' expectations. In several research studies, including one published in a recent issue of Journal of Portfolio Management (Summer 1997), Brown has shown that rank 1 stocks typically outperform rank 2 stocks; rank 2 stocks typically outperform rank 3 stocks; rank 3 stocks typically outperform rank 4 stocks; and rank 4 stocks typically outperform rank 5 stocks. The results are based on averages and do not pertain to all stocks and all time periods.
The accompanying table provides (ESPTM) group and percentile rankings based upon the I/B/E/S model for the largest 30 public companies. One requirement for the firm to be included in the model is that it be followed by at least two security analysts who provide earnings forecasts to I/B/E/S International Inc.
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For more information contact: Larry Brown, School of Accountancy, 651-0545 ([email protected]) I/B/E/S International Inc. (1-800-Get-IBES)
Earnings Surprise Prediction for Dow 30 Stocks
Company Rank (1 to 5) Percentile (99 to 1)
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AT&T 1 98
Allied Signal 3 65
Alcoa 3 55
Am Express 1 93
Boeing 4 29
Caterpillar 1 99
Chevron 1 99
Coca-Cola 1 89
Disney 1 98
Dupont 2 75
Eastman Kodak 2 71
Exxon 1 99
General Electric 1 93
General Motors 1 90
Goodyear 3 55
Hewlett Packard 4 34
IBM 2 81
International Paper 2 79
Johnson & Johnson 2 72
McDonalds 4 34
Merck 2 84
Minn Mining & Man 3 59
Morgan JP 3 58
Philip Morris 3 56
Proctor and Gamble 2 68
Sears 2 84
Travelers 1 96
Union Carbide 1 91
United Technologies 1 99
Wal Mart 2 84
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