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Whisper Numbers – What Do They Mean?

On January 20th, Check Point Software announced its quarterly earnings and its share price promptly plunged $10.50, losing nineteen percent of its value in a single day.

What caused the big drop? Did earnings come in far below published forecasts? No! Earnings matched consensus earnings forecasts to the penny. So what happened? Even though Check Point met the published earnings forecast, they missed their "whisper number." The whisper number is the earnings well-connected investors actually expect a company to report.

Where Do Earnings Forecasts Come From?
Most full-service stockbrokers employ analysts to report on companies of interest to their customers. The reports usually include a buy, sell, or hold recommendation for the stock, and the analysts’ prediction for the company’s future earnings. These research reports are distributed to customers and other interested parties.

Companies such as Zacks, First Call, and I/B/E/S collect research reports from many analysts and compile them into consensus reports. A consensus report summarizes all of the analysts’ recommendations for a company, and averages the earnings forecasts for a specific period into a single number: the widely reported consensus earnings forecast. When you hear a company is expected to earn so many cents a share this quarter, or this year—you’re hearing the average of many different analysts’ forecasts.

Low Forecasts Avoid Problems
If a company’s earnings exceed the consensus forecast, everybody is happy and the stock usually goes up. Conversely, if they miss the forecast, the stock often drops. It’s not pleasant for an analyst if a stock they’ve recommended drops in price. Clients who followed their advice and bought the stock understandably get upset.

Analysts often avoid the problem by publishing forecasts below what they think the company will earn. If everything goes as planned, the company will end up exceeding their estimate. If the company’s results come in a little low, they’ll still meet forecasts.

Can’t Keep a Secret
Often the word slips out that analysts expect the company to earn more than their published estimates. Maybe the analyst tells his best customers. Sometimes the company itself reveals the true numbers. Whatever the source, other numbers, usually higher than the published forecasts, begin to circulate.

These are whisper numbers. Investors in the know hear them and expect the company to meet the higher whisper number instead of the published forecast.

Reported Earnings Compared to Whispers
In the case of Check Point Software, the published estimates called for fourth quarter earnings of 47 cents a share, but the whisper number was 50 cents. When Check Point reported 47 cents, in the know investors were disappointed and dumped the stock.

Now Small Investors Can Get Whisper Numbers on the Net!
The best source I’ve found is Earnings Whispers.com (www.earningswhispers.com). It’s easy to use. Enter a company name or ticker symbol and Earnings Whispers displays the published consensus forecast, the whisper number, and the date the company is expected to report earnings.

It can be even easier. Sign up and they will periodically send you an e-mail whisper number report. You can set up a portfolio and check the whisper numbers for all your stocks at once.

How does Earnings Whispers get the numbers? According to information on their site, they rely primarily on contacts either within, or involved with the company. Possibly an officer, accountant, employee, customer, or vendor. Failing that, they’ll check with brokers, analyze e-mail tips, or monitor online bulletin boards.

Whatever the source, they don’t take the information at face value. They look at a company’s history of beating or missing forecasts, check the forecasts of analysts who’ve been historically most accurate, etc., before coming up with their whisper number.

Whisper numbers are posted about three or four weeks before the expected report date. You can check a calendar on the site to see companies expected to report within the next few days, or look up a company to find their anticipated report day.

How accurate are whisper numbers?
A recent study found that published consensus reports underestimated earnings by about six percent, while whisper numbers overestimated them by almost five percent. So it looks like you could do best by averaging the published and whisper numbers.
Published 2/14/99

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