Estimates miss earnings, not vice versa

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I am particularly interested in buying companies when their long term prospects are intact but they are cheap because they face short term issues” Robert Vinali

“Companies that “miss” the analysts’ consensus estimates can see their stock price decimated. Is the quarter-to-quarter earnings target really more important than a company’s ability to increase shareholder value long term” Christopher Browne

It is important to remember, the intrinsic value of a company reflects the present value of the cash that can be taken out of the company over its lifetime. On this basis, one quarter, or even one years’ earnings are unlikely to have a major impact on the long term value of the company.

“A couple of bad years of earnings shouldn’t determine the intrinsic value of those companies” Matthew McLennan

“The value of a business is determined by the present value of the cash it generates over its lifetime, not based on what next year’s earnings are going to be. While the first year’s cashflows in a discounted cash flow valuation carry the most weight in the calculation, years two through 20 and thereafter contribute many multiples of year one’s value in determining the present value” Bill Ackman

I am amazed at the number of analyst reports that focus on the upcoming earnings release as opposed to the longer term drivers of a business and its intrinsic value.

The next time a company you like, understand and think is high quality misses an earnings estimate, rather than run away it might be worth running towards it. The share prices of high quality companies will recover to reflect the longer term value residing in the company. It’s just that the timing of any such recovery is unknowable.

Remember it’s just an estimate. And estimates miss earnings – not vice versa.”

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