A lesson on the perils of projecting earnings from the Harvard Business Review’s The Daily Stat:
For the past quarter century, equity analysts’ earnings-growth estimates have been almost 100% too high. Their overoptimistic projections have generally ranged from 10% to 12% annually, compared with actual growth of 6% (excluding the spike in growth from 1998–2001), according to McKinsey research. Only in strong-growth years such as 2003 to 2006 did forecasts hit the mark.
As Robert Bruce says (via The Fallible Investor):
Perhaps the most surprising thing to me is the inability of even market professionals to adjust for profit margins. People will talk about how the P/E ratio is reasonable at 19 times without mentioning that it is 19 times the highest profit margins ever recorded. The least we can do, as professionals, is to normalise between economic boom and economic bust, between low profit margins such as those in 1982 when they were ½ normal and very high profit margins such as those of today. A lot of people think profit margins can be sustained. Profit margins are the most mean-reverting series in finance.
For more, see the McKinsey Quarterly’s Equity Analysts: Still too bullish.