Analysts of investment banks and securities firms routinely publish analyses of companies in which they deal with both the current situation of the company, as well as its prospects for the future.
These analyses are interesting for several reasons:
1) They serve to educate potential investors about theÂ general operation of the company.
2) They identify specific variables that are important for the successÂ of the business.
For example, some companies are particularly affected by the evolution of the dollar, regulation, the expiration of patents, internet penetration in households, the price of oil, etc. With this, any investor can make estimates about the future profits of the company. These estimates do not need to be accurate, ie it is not necessary to know exactly how much the profit per share (EPS) a certain company will achieve in the next 3 years, for example.
Investment banks have teams of highly trained professionals who are dedicated exclusively to estimating EPS,Â and each bank or company generatesÂ different forecasts. Of course you’ll be lucky to hit one of them, at most. The good news is that to make money investing you do not need to hit the EPS precisely. A simple and useful way to use these reports is to detect the most important factors for each company’s business evolution, and to estimate whether they will behave better or worse in the future than in the past (will they beat analyst forecasts).
3) They offer forecasts on the EPS and the company’s dividend for the next 2 or 3 years: Most likely, the actual data will not coincide with forecasts, but this is not a criticism of analysts. No one knows the future. The utility of these figures is not in their accuracy, but rather, in the trend they show. For example, if EPS is expected to grow at an average of 6%, the conclusion to be drawn is that we are facing a low growth company. If, on the other hand, the expected growth is 20% the company can be included among the high growth stocks. It is more important to know if the growth of the company is expected to be low or high than if it will be 5.3% or 6.2%. It is also interesting to see how they have reached these figures, whether they have been especially cautious, optimistic, factored in macro economic conditions, competition etc. It all comes down to the strength of the analyst.
4) They also usually offer an overview of the sector in which the company is located. It is preferable to invest in companies that are within growing and future-oriented sectors than those in declining sectors. While there may also be good companies that represent good investment opportunities in uninteresting sectors.
5) It’s very important to know the company’s future plans, and on how it plans to increase its profits in the coming years.
6) If the company has to face some important legal, technical problem you will also know through these reports, and you can be sure to include it in your estimates.
7) Target price: This may be the least important part for a long-term investor, but it is the one that is more usually set by the public. When a report says “our target price for the next 12 months is $20,” we have to interpret it as “if the stock reaches $20 at some point in the next 12 months it seems a good level of sale for the short and medium term investors.” For a long-term investor who intends to hold shares indefinitely, or at least for many years, this figure is not important.
Analyst reports are not foolproof, but they are very useful for better understanding your investments and for making decisions with a better knowledge of the facts.Â These reports are generally provided free of charge to clients of the bank or securities holding company. Some banks or companies provide them free of charge to the general public.