1 in 3 Companies Misses Analyst Forecasts by 10% in 2003 4th Period; But Signs of Improvement Emerge as Companies Upgrade Financial Systems.

Business Editors

CHICAGO--(BUSINESS WIRE)--May 27, 2004

Nearly one in three companies among the Standard & Poors 500 stock index missed analysts' earnings-per-share projections by at least 10 percent in the 2003 fourth quarter. This gap may signal defects in their financial-management processes, says Parson Consulting, the leading financial management consultancy that conducted the study.

Yet, while 31 percent of companies missed or beat analysts' EPS estimates by a wide margin last quarter, the study indicates that companies gradually are improving their accuracy. In the first quarter of 2003, Parson found that 36 percent of S&P500 companies missed or beat projections by at least 10 percent. This improvement may in part reflect an upgrade in company finance functions, Parsons says.

After a prolonged period of under-investment in financial management systems, more companies are strengthening their financial-management infrastructure and integrating data, reporting, and analysis, partially in response to recent accounting legislations such as the federal Sarbanes-Oxley Act and accelerated Securities and Exchange Commission filing deadlines. Consequently, companies have more precise financial information available in a relatively shorter time frame. As a result, analysts obtain better data to use in projecting EPS estimates more accurately.

"Equity research analysts rely on a broad variety of data to compute EPS estimates, including widely available public data as well as current and historical financial information obtained directly from companies themselves," notes Toni Hicks, senior vice president, Practices of Parson Consulting. "One reason a sizable number of earnings 'misses' occur is because companies' finance functions are saddled with outdated or non-comprehensive financial-management infrastructures and cannot provide accurate information in a timely manner."

Hicks added: "With more streamlined processes and integrated systems, Wall Street will get better data and that should contribute to more 'hits' and fewer 'misses' during earnings season. By investing in integration of data, reporting and analysis, together with the sustaining infrastructure, companies not only can improve the accuracy and speed of their financial reporting, but also achieve improved decision making, knowledge creation and increased value to the organization"

The high-tech sector stands out as the industry with the greatest number of wide-margin inaccuracies. In the 2003 fourth quarter, 43 percent of high-tech companies missed analyst forecasts by at least 10 percent. Of these misses, 3.3 percent were on the downside, while 40 percent beat expectations on the upside. During the tech-stock explosion, analysts were accused of inflating company projections and performance estimates, causing many companies to fall short of expectations. Consequently, analysts today employ a more conservative approach to avoid such a recurrence. And, although exceeding expectations certainly beats falling short, earnings misses on the upside - especially significant, positive variances - suggest that the company and the analyst have allowed investors to forego a good investment.

However, although technology companies are still way off the mark in terms of hitting earnings expectations, they're moving in the right direction. In the first quarter of 2004, 53 percent of tech companies missed analyst forecasts by a wide margin, nearly 10 percent greater than in the most recent quarter. This implies that even technology companies, the so-called worst offenders, may be improving their financial processes and consequently helping analysts to make more accurate predictions.

"A company's ability to predict, and then meet, its quarterly-earnings targets consistently indicates that senior managers, especially the chief financial officer, have strong internal systems for reporting and modeling," Hicks says. "In short, the ability to 'hit' rather than 'miss' is a sign that the company is well-managed -- and well-run companies typically earn a premium in the market."

Industry-specific findings Include:

-- Health-care companies are most consistently on the mark, as

only 4.4 percent of companies missed EPS projections by more

than 10 percent in the fourth quarter of 2003.

-- Financial firms' performances have more closely matched

analyst projections as 10.8 percent of companies missed

projections on the downside in the fourth quarter, down from

19.3 percent in the first.

-- While materials, energy, and utility companies lag behind

other sectors in their performance to forecasts, some

improvements have emerged. In the first quarter, less than

one-third of companies either met or narrowly (less than 10

percent) beat forecasts, while in the fourth, the number

increased to 41 percent.

-- An increasing number of industrial firms also narrowly beat

forecasts. The number of industrial firms that met or narrowly

beat forecasts increased to 49 percent in the fourth quarter

from 29 percent in the first period.

Parson Consulting

Parson Consulting provides financial management, accounting and business support services across all industry sectors. The company focuses on realizing greater reliability, efficiency and speed of operations for client's finance and business support functions. Parson currently has over 1,000 clients, with a third of those from the Fortune 500. Parson Consulting is headquartered in Chicago, IL, and is a wholly owned subsidiary of Management Consulting Group PLC, a global consultancy listed on the London Stock Exchange.

Methodology

For this study, Parson examined public data for all of the S&P 500 companies. Specifically, Parson focused on difference between EPS consensus estimates and actuals, using data from Thomson First Call.