Powerful paper - Analysts don't discount future earnings

 

Of course, we know how we price assets. You discount future cash flows. Every business school student, every MBA, every Wall Street analyst knows this. End of story, yet a new paper which is refreshing direct in it writing says that this is not the case. See "EXPECTED EPS × TRAILING P/E". 

Let's start with their abstract: 

"We study a sample of 513 reports and find that most analysts use a trailing P/E (price-to-earnings) ratio not a discount rate. Instead of computing the present value of a company’s future earnings, they ask: “How would a firm with similar earnings have been priced last year?” Even if other investors do things differently, it does not make sense to put discount rates at the center of every asset-pricing model if market participants do not always use one."

This paper looks at the actual way that analysts form their price targets. We know how they do it because they must report it. It is a FNRA requirement. Analysts do not discount future earnings but look to the past to make their forecasts. Almost everyone is doing it this way so there is not a lot of value with trying to do it the "right" way. The tables provided speak for themselves. The real question is why it is done this way given all the education of these analysts.