MB,
I have developed my own earnings, cash flow, and ROE models of
several companies that I have held. These models include such
factors as capital and organizational structure, market acceptance
of new products, replacement rates and saturation of existing
products, and potential problems with suppliers. In addition, the models include such exogenous factors as the interest rate climate
and general business conditions.
I have used my models to test the analyst earnings estimates for
several major companies such as CSCO, INTC, MSFT, LU, DELL, and
ORCL. In every case, the variance of analyst estimates understated
the variance based on history by at least a factor of 3. That is,
the analyst estimates for earnings tend to be lumped together
three times closer than one would expect if one were using the
historical, "typical" variances of all the input variables.
This has led me to believe that very few analysts actually do any
analysis at all - they put their finger to the wind to generate their
estimates. The fact that CSCO would be so blatant in their concern
about an analyst not following the official lockstep is only
confirmation of my suspicion that the true goal of the analysts
is to help distribute shares to the retail customer.
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