The Stock Valuation Process: The Analysts’ View

Abstract

How do analysts evaluate common stocks? A survey of 2,000 members of the Financial Analysts Federation indicates that analysts consistently emphasize the long term over the short term. Expected changes in EPS, expected return on equity, and prospects for the relevant industry were considered the most important variables over the long term; industry prospects, expected changes in EPS and general economic conditions were given greatest weight over the short term. Analysts look to qualitative factors such as quality and depth of management, market dominance and strategic credibility (ability to achieve stated goals) to validate quantitative financial and economic variables. The majority of analysts surveyed also felt that corporate strategic plans and planning systems are of great importance in the stock valuation process, but that the information on strategic plans and planning provided by management is of generally low quality. Analysts view management presentations as both the medium for assessing the quality and depth of management and the source of information regarding management's plans.