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During earnings season, stocks rise or fall on whether their EPS exceeds consensus. Frequently, beating or missing by a penny is enough to drastically move a stock. But really, how real are these numbers upon which investors place so much value? Is that penny beat or miss to be trusted? Let's look at BBT which reported 30 cents of earnings. Excluding 3 cents of merger costs, they made 33 cents, one cent below consensus. On a very big day, when the S & P rose 2.2%, BB&T (NYSE:BBT) fell 2.2%. Is that fair? After all, last year they earned 20 cents, a lot less than this quarter's 33 cents. What's a penny?

So how real was this quarter's 33 cents?

You'll note in BBT's financial statement, that income before income tax was $249 million, exactly the same as it was a year ago. How can that be? The company increased its EPS over 50%, yet had the same income before tax. Well, taxes this quarter were priced at $25 million, while last year, they were $41 million. Again, this quarter taxes were 10% while last year's corresponding period came out at 17%.

Perplexing, no? Analysts at BBT's earnings conference call were equally puzzled. Here's the answer to their questions.

It's really when you have to forecast the earnings for the company, we basically just make sure that our average tax rate for the year would be around 15%, 16%. So since we're at 19% the first quarter, we had to lower it to 10% this quarter but we think we'll be in the mid teens for the rest of the year, averaging that in the rest of the year and for the end of the year as well.

In essence, BBT used a low tax figure for the quarter to smooth out its expected yearly rates. By doing so, this quarter's numbers look quite a bit better than if they used say a 15% rate. Then, BBT would have been 6 cents below consensus. If it had decided on a lower 8% rate, BBT would have beaten the street by 2 cents and, then, perhaps the stock would have taken off with the rest of the market. Not to pick on BBT, but how arbitrary is that? Unfortunately, decisions as where to set the quarter's tax rate can easily create a beat or disappointment in earnings. Clearly, only a careful examination of the financial record can be relied upon to determine the strength of the quarter.

P.S. For those interested, the lower tax rate this quarter (and year) has to do with tax credits and higher muni holdings. As to last year's numbers, dividends and accretion on preferred stock took off a huge chunk of money to the tune of $83 million. Sadly, the 20 cent to 30 cent climb did not represent a growing income stream but rather a host of tax and preferred stock treatments.

Disclosure: No position

Source: So Were BB&T's Earnings Good or Bad?