expectedtobeunbiasedaboutthecompany’sfuture
prospectsand,byextension,theirownmanagement
skills.Alltoooften,managementforecastsrepresent
wish lists rather than realistic expectations for the
future.- There is a different problem that is created when
management compensation is tied to meeting or
beatingtheforecastsprovided.Inthiscase,therewill
be a tendency to playdown expectations with the
intent of beating forecasts and generating rewards. - Finally, management forecasts can represent
combinations of assumptions that are inconsistent.
For instance, management may forecast revenue
growthof 10 percentayearforthenext 10 yearswith
littleornonewcapitalexpendituresovertheperiod.
Whileutilizingexistingassetsmoreefficientlymay
generatesomeshort-termgrowth,itisdifficulttosee
how it can be the basis for long-term growth.
We are not arguing that management forecasts should be
ignored.Thereisclearlyusefulinformationintheseestimates
andthekeyisto makesurethatmanagementforecastsare
feasible and internally consistent.
Analyst Estimates
Whenvaluingpublicly traded firms,we dohaveaccessto
forecastsofgrowththat otheranalyststrackingthesefirms
have made. Services like Institutions Brokers Estimate
System(IBES)andZacksaggregateandsummarizeanalyst
forecasts and make them widelyaccessible. Thus, we can
easilyfindoutwhatanalystsfollowingGoogle,forexample,