Similar to 1Q21, misleading earnings beats continue in 2Q21. Operating Earnings from S&P Global (SPGI) exaggerated the drop in 2020 and are overstating the rebound in S&P 500 earnings over the last five months. The same is true for I/B/E/S Street Earnings for individual companies.
This report shows:
- why Street Earnings (and GAAP earnings) are flawed
- five S&P 500 companies with overstated Street Earnings and a Very Unattractive Stock Rating
- how Core Earnings and our Earnings Distortion factor generate alpha
Over 200 S&P 500 Firms Overstate EPS by More than 10%
Per Figure 1, 75% of the S&P 500 companies have overstated Street EPS over the trailing twelve months (TTM) through 2Q21[1]. 43% have overstated EPS by more than 10%. Overall, when companies overstate, earnings they do so by an average of 23%.
Figure 1: Street Earnings Overstate Earnings for 375 S&P 500 Companies[2]
Sources: New Constructs, LLC and company filings.
S&P Global’s Earnings Rebound Is Misleading
In theory, Wall Street analysts and research firms create adjusted earnings measures like Street Earnings and Operating Earnings to exclude unusual gains and losses. In reality, these adjusted earnings measures rarely, if ever, fully capture unusual items, which have a very material impact on results.
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[1] The most recent Core Earnings and Street Earnings values are based on the latest audited financial data from calendar 2Q21 10-Qs.
[2] Average understated % is calculated as Street Distortion as a percent of Street Earnings. Street Distortion is the difference between Street Earnings and Core Earnings.
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This article originally published on September 20, 2021.
Disclosure: David Trainer, Kyle Guske II, Alex Sword, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.
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David Trainer, Kyle Guske II, Sam McBride, Matt Shuler, Alex Sword, and Andrew Gallagher receive no compensation to write about any specific stock, style, or theme.
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