Q2 2022 Earnings: Where Street Estimates Are Too Low And Who Should Beat

Jul. 11, 2022 1:41 PM ETHSY, MTCH, MSFT, NVDA4 Comments

Summary

  • There are many S&P 500 companies whose Street Earnings understate their true Core Earnings.
  • We highlight five S&P 500 companies (with a focus on two) with understated Street estimates likely to beat 2Q22 earnings.
  • Below we specifically detail the hidden and reported unusual items that have created Street Distortion and understated Street Earnings in 1Q22 for Match Group and The Hershey Company.
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While Street Earnings[1] overstate profits for the majority of S&P 500 companies, as shown in Street Earnings Overstated for 67% of S&P 500 Companies in 1Q22, there are many S&P 500 companies whose Street Earnings understate their true Core Earnings.

This report shows:

  • the frequency and magnitude of understated Street Earnings in the S&P 500; and
  • five S&P 500 companies with understated Street estimates likely to beat 2Q22 earnings.

Street Understates EPS for 152 S&P 500 Companies

152 companies with understated Street Earnings represent 27% of the market cap of the S&P 500 as of 5/16/22, which is up from 20% at the close of 2021, measured on a rolling four quarter basis.

The increase from the prior TTM period is driven largely by Microsoft (MSFT) and NVIDIA Corporation’s (NVDA) Street Earnings swinging from overstated through 2021 to understated through 1Q22. Combined, these two firms make up 7% of the S&P 500 market cap through 5/16/22. For comparison, in 2021 there were 155 companies that had understated Street Earnings for the year.

Figure 1: Understated Street Earnings as % of Market Cap: 2012 through 5/16/22

Understated Street Earnings as % of Market Cap: 2012 through 5/16/22

Understated Street Earnings as % of Market Cap: 2012 through 5/16/22 ( New Constructs, LLC)

Sources: New Constructs, LLC and company filings.

When Street Earnings understate Core Earnings, they do so by an average of -27% per company in 1Q22, per Figure 2. Street Earnings understate by >10% for ~9% of S&P 500 companies.

Figure 2: Street Earnings Understated by -28% on Average in TTM Through 1Q22[2]

Street Earnings Understated by -28% on Average in TTM Through 1Q22

New Constructs, LLC (Street Earnings Understated by -28% on Average in TTM Through 1Q22)

Sources: New Constructs, LLC and company filings.

Five S&P 500 Companies Likely to Beat Calendar 2Q22 Earnings

Figure 3 shows five S&P 500 companies likely to beat calendar 2Q22 earnings based on understated Street EPS estimates. Below, we detail the hidden and reported unusual items that have created Street Distortion and understated Street Earnings in the TTM ended 1Q22 for Match Group, Inc. (MTCH) and Long Idea The Hershey Company (HSY).

Figure 3: Five S&P 500 Companies Likely to Beat 2Q22 EPS Estimates

Five S&P 500 Companies Likely to Beat 2Q22 EPS Estimates

New Constructs, LLC (Five S&P 500 Companies Likely to Beat 2Q22 EPS Estimates)

Sources: New Constructs, LLC, company filings, and Zacks
*Assumes Street Distortion as a percent of Core EPS equals the same percent in 2Q22 as the TTM ended 1Q22

Match Group: The Street Understates Earnings for 2Q22 by $1.08/share

The Street’s 2Q22 EPS estimate of $0.68 for Match Group is understated by $1.08/share. The difference is driven by the large “other expense” included in historical EPS. Our estimate for 2Q22 Core EPS of $1.76/share significantly exceeds the Street EPS estimate, leading us to forecast Match Group as one of the companies most likely to beat Wall Street analysts’ expectations in its calendar 2Q22 earnings report. Match Group’s Earnings Distortion Score is Strong Beat while its Stock Rating is Neutral.

Unusual expenses, which we detail below, materially reduced Match Group’s TTM 1Q22 Street and GAAP Earnings and make profits look worse than Core EPS. Once all unusual items have been removed, we find that Match Group’s TTM 1Q22 Core EPS are $2.31/share, which is better than the TTM 1Q22 Street EPS of $0.89/share and TTM 1Q22 GAAP EPS of $0.92/share.

The large disconnect between Street and Core Earnings indicates that Street Earnings fail to capture all unusual items.

Figure 4: Comparing Match Group’s Core, Street, and GAAP Earnings: TTM Through 1Q22

Comparing Match Group’s Core, Street, and GAAP Earnings: TTM Through 1Q22

New Constructs, LLC (Comparing Match Group’s Core, Street, and GAAP Earnings: TTM Through 1Q22)

Sources: New Constructs, LLC, company filings

Below, we detail the differences between Core Earnings and GAAP Earnings so readers can audit our research. We would be happy to reconcile our Core Earnings with Street Earnings but cannot because we do not have the details on how analysts calculate their Street Earnings.

Figure 5 details the differences between Match Group’s Core Earnings and GAAP Earnings.

Figure 5: Match Group’s GAAP Earnings to Core Earnings Reconciliation: TTM Through 1Q22

Match Group’s GAAP Earnings to Core Earnings Reconciliation: TTM Through 1Q22

New Constructs, LLC (Match Group’s GAAP Earnings to Core Earnings Reconciliation: TTM Through 1Q22)

Sources: New Constructs, LLC and company filings.

More details:

Total Earnings Distortion of -$1.39/share, which equals -$428 million, is comprised of the following:

Reported Unusual Expenses Pre-Tax, Net = -$1.50/per share, which equals -$463 million and is comprised of

Tax Distortion = $0.11/per share, which equals $34 million.

Reported Unusual Expenses After-Tax, Net = <-$0.01/per share, which equals -$509 thousand and is comprised of

  • $509 thousand in income in the TTM period based on $509 thousand in earnings from discontinued operations in 2Q21

The similarity between Street Earnings and GAAP Earnings for Match Group indicates that Street Earnings fail to account for most of the unusual items in GAAP Earnings, even as the unusual items are reported directly on Match Group’s income statement. Core Earnings on the other hand include a more comprehensive set of unusual items when calculating Match Group’s true profitability.

The Hershey Company: The Street Understates Earnings for 2Q22 by $0.14/share

The Street’s 2Q22 EPS estimate of $1.66 for The Hershey Company is understated by $0.14/share. The difference is driven by large write-downs of equity investments included in historical EPS. Our estimate for 2Q22 Core EPS of $1.80/share significantly exceeds the Street EPS estimate, leading us to forecast The Hershey Company as one of the companies most likely to beat Wall Street analysts’ expectations in its calendar 2Q22 earnings report. The Hershey Company’s Earnings Distortion Score is Beat and its Stock Rating is Attractive.

Unusual expenses, which we detail below, materially reduced The Hershey Company’s TTM 1Q22 Street and GAAP Earnings and make profits look worse than Core EPS. Once all unusual items have been removed, we find that The Hershey Company’s TTM 1Q22 Core EPS are $8.44/share, which is better than the TTM 1Q22 Street and GAAP EPS of $7.79/share.

The large disconnect between Street and Core Earnings indicates that Street Earnings fail to capture all unusual items.

Figure 6: Comparing The Hershey Company’s Core, Street, and GAAP Earnings: TTM Through 1Q22

Comparing The Hershey Company’s Core, Street, and GAAP Earnings: TTM Through 1Q22

New Constructs, LLC (Comparing The Hershey Company’s Core, Street, and GAAP Earnings: TTM Through 1Q22)

Sources: New Constructs, LLC, company filings

Below, we detail the differences between Core Earnings and GAAP Earnings so readers can audit our research. We would be happy to reconcile our Core Earnings with Street Earnings but cannot because we do not have the details on how analysts calculate their Street Earnings.

Figure 7 details the differences between The Hershey Company’s Core Earnings and GAAP Earnings.

Figure 7: The Hershey Company’s GAAP Earnings to Core Earnings Reconciliation: TTM Through 1Q22

The Hershey Company’s GAAP Earnings to Core Earnings Reconciliation: TTM Through 1Q22

New Constructs, LLC (The Hershey Company’s GAAP Earnings to Core Earnings Reconciliation: TTM Through 1Q22)

Sources: New Constructs, LLC and company filings.

More details:

Total Earnings Distortion of -$0.65/share, which equals -$136 million, is comprised of the following:

Hidden Unusual Expenses, Net = -$0.05/per share, which equals -$11 million and is comprised of

  • -$1 million in cost of sales and selling, marketing, and administrative expense associated with business realignment activities in 1Q22; and
  • -$10 million in cost of sales and selling, marketing, and administrative expense associated with business realignment activities in the TTM based on -$13 million in 2021.

Reported Unusual Expenses, Net = -$0.66/per share, which equals -$136 million and is comprised of

Tax Distortion = $0.05/per share, which equals $11 million.

The similarity between Street Earnings and GAAP Earnings for The Hershey Group indicates that Street Earnings fail to account for most of the unusual items in GAAP Earnings, even as most of the unusual items are reported directly on The Hershey Group’s income statement. Core Earnings, in contrast, account for materially more unusual items and enable us to measure earnings more accurately for The Hershey Group.

[1] Street Earnings refer to Zacks Earnings, which are adjusted to remove non-recurring items using standardized sell-side assumptions.

[2] Average understated % is calculated as Street Distortion, which is the difference between Street Earnings and Core Earnings.

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This article was written by

David Trainer profile picture
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New Constructs is an independent research technology firm that provides unrivaled insights into the fundamentals and valuation of private & public businesses. Combining human expertise with machine learning and NLP, the firm shines light into the dark corners (e.g. footnotes) of millions of financial filings and provides superior investment research. The firm's Robo-Analyst technology is the first-ever vertically integrated investment research platform: performing data collection, financial modeling and assigning investment ratings to over 10,000 securities - automatically. This new technology is research automation at its best according to:


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David is CEO of New Constructs (www.newconstructs.com). David is a distinguished investment strategist and corporate finance expert. He was a 5-yr member of FASB's Investors Advisory Committee. He is author of the Chapter “Modern Tools for Valuation” in The Valuation Handbook (Wiley Finance 2010). 


Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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