OK, so I couldn't resist digging further on this, and here is the first research I came up with.

Context for the first paper was a large dataset of European research published from Jan 1 2000 up to 31 Dec 2006, so it got caught up in the dotcom crash and dodged the GFC, The second paper is a much smaller database (n=120) from Jan 2005 to Jan 2007. I've not yet found anthing more recent, nor anything ASX-focused, but the quest continues.

What the abstract in the second paper doesn't say is that accrual based models (i.e. using multiples and ratios, like PE, ) achieve an accuracy of 70% where 12 month SP achieves within 5% of target price, and cashflow models (like DCF) achieve 61% accuracy on the same measure.

PAPER 1

Target Price Accuracy in Equity Research

STEFANO BONINI, LAURA ZANETTI, ROBERTO BIANCHINI AND ANTONIO SALVI

Journal of Business Finance & Accounting, 37(9) & (10), 1177–1217, November/December 2010, 0306-686X doi: 10.1111/j.1468-5957.2010.02209.x

Abstract:

Analysts’ target prices have received limited attention in academic research. In this paper we try to fill the gap by developing an innovative multi-layer accuracy metric that we test on a novel database. Our analysis shows that forecasting accuracy is very limited: prediction errors are consistent, auto-correlated, non-mean reverting and large (up to 36.6%). The size of forecasting errors increases with the predicted growth in the stock price, the size of the company and for loss making firms. Additionally, the intensity of research and the market momentum negatively affect accuracy. These results suggest that analysts’ research is systematically biased which supports theoretical predictions by Ottaviani and Sorensen (2006). Since stock price forecasting is largely an unmonitored activity, market participants may fail in fully understanding this behavior, thus not arbitraging away these inefficiencies.

PAPER 2

Equity valuation models and target price accuracy in Europe: Evidence from equity reports

Shahed Imam, Jacky Chan, Syed Zulfiqar Ali Shah

International Review of Financial Analysis, Volume 28, June 2013, Pages 9-19, https://doi.org/10.1016/j.irfa.2013.02.008

Abstract:

This study examines whether European investment analysts prefer cash flow based valuation models over

accrual based models, how accurate valuation models are and whether the use of cash flow based models

(with or without accrual based models) improve forecast accuracy. We conduct a comprehensive content

analysis of equity research reports for most of the firms on the components list of the Dow Jones Euro

Stoxx 50 Index. We find that earnings multiples and the discounted cash flow (DCF) valuation models are

the two most popular valuation models and the use of accrual based multiple alongside a cash flow based

model improves the forecast error and this is in line with the intuition that accruals add value relevant

information to cash flows. However, we also find that neither cash flow nor earnings multiples are superior to

book value and return on equity (ROE) based models in terms of forecast error. Our results provide support

for the use of book value and ROE based models which provide more precise forecasts and this, in turn,

supports the use of accounting based models, i.e., a residual income model.

I thought I would comment on the usefulness of price targets. intersting that PT's are probably quoted more now then in the past, when the broker community (the input) is probably at its lowest quality in at least 30 Years! I have observed price targets for about 30 years and my conclusions are that they are of limited value. There are several reasons for this.

A few years’ ago one of my young analysts came to me excited that he thought he had found something that we could use in our valuation work. He pointed out price targets for each stock and suggested we could use these in our analysis, an average for some other measure.

I said fair enough if you can show me that they are useful predictors of value or share prices then I will be interested. An aid in this endeavour was that several years ago the US based investment banks had put their recommendations or price targets on an actual historic share price graph over many years. Therefore you could easily tell the predictive power. Interestingly this was contained in the compliance section of analyst reports not in the actual investment analysis. My conclusion on this point was that the investment banks were covering any potential liability that could arise from people relying on price targets.

It did not take long for the young analyst to come back and report to me the price targets were of little use. The closest correlation he found was that they were a lagging indicator of the share price. That is, they followed the share price higher or lower as the case may be and back again.

There are several reasons for this in my opinion. Firstly, analysts and not incented to actually get their price targets right. They are incented to create activity in their stocks and also covet any potential corporate work such as underwriting equity raisings. Secondly, many years ago the (mainly) large stockbrokers realised there was a sweet spot in price targets. If they were too high they would not be taken seriously, if they were too low and they did not encourage institutional to trade. Price targets then more or less hovered around 10 to 20% above the current share price.

As well as not being incented on share price targets, some analysts are just not expert at valuation work. They maybe industry experts for instance and have great industry contacts that helps in ECM. Some have a large coverage and concentrate on companies were they have a chance at ECM or know better and can add value and the rest are just gap fillers. Etc etc

I could go on but you probably get the drift. There is some use in price targets. Some people use the change in price targets as an indication of whether the stock is a buy or a sell. This implies that the actual level of the price target is not important but whether the target is going up or down is. I have some sympathy with this method but is a momentum type strategy.

Some (mainly) smaller stock broking analysts are more likely to keep their price targets. Sometimes this is due to being in denial or hopefully getting a catalyst where they can move their price target and save face. Sometimes they are true valuations. Hard to tell.

As investors my view is that we want a pure investment assessment tied with sensitivity analysis and the important underlying assumptions highlighted, so you can take a view on these. in my view that would be a lot more useful. Of course there is research as such, but a minority imo. provocative i know