Street Earnings, as reflected in Zacks Earnings, are marketed as being adjusted to remove non-recurring items. Our Core Earnings show Street Earnings fail to account for a material amount of unusual items, which distorts investor's view of profitability across the S&P 500. This report shows:
For 340 companies in the S&P 500, or 68%, Street Earnings overstate Core Earnings for the trailing-twelve-months (TTM) ended calendar 2Q22. In the TTM ended 2Q21, 371 companies overstated their earnings.
When Street Earnings overstate Core Earnings they do so by an average of 19%, per Figure 1. For over a third of the S&P 500 (186 companies) Street Earnings overstate Core Earnings by more than 10%.
Figure 1: Street Earnings Overstated by 19% on Average in TTM Through 2Q22
The 340 companies with overstated Street Earnings make up 73% of the market cap of the S&P 500 through 8/12/22, which is up from 70% through 1Q22, measured with TTM data in each quarter.
Figure 2: Overstated Street Earnings as % of Market Cap: 2012 through 8/12/22
Figure 3 shows five S&P 500 stocks with an Unattractive-or-worse Stock Rating and the most overstated Street Earnings (Street Distortion as a % of Street Earnings per share) over the TTM through 2Q22. "Street Distortion" equals the difference between Core Earnings per share and Street Earnings per share. Investors using Street Earnings miss the true profitability, or lack thereof, of these businesses.
Figure 3: S&P 500 Companies with Most Overstated Street Earnings: TTM Through 2Q22
In the section below, we detail the hidden and reported unusual items that distort GAAP Earnings for Salesforce Inc. All these unusual items are removed from Core Earnings.
The difference between, or Street Distortion in, Salesforce's Street Earnings ($2.30/share) and Core Earnings ($0.21/share) is $2.09/share, or 91% percent of Street Earnings.
Salesforce's GAAP Earnings overstate Core Earnings by $0.80/share, which indicates that Street Earnings are more overstated and miss many of the unusual items that distort GAAP Earnings for Salesforce.
Figure 4: Comparing Salesforce's GAAP, Street, and Core Earnings: TTM Through 2Q22
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.
Salesforce's Earnings Distortion Score is Miss and its Stock Rating is Unattractive. Salesforce receives an Unattractive rating due to its low return on invested capital (ROIC) of 1% and an expensive valuation. Despite trading at $184/share CRM has an economic book value (EBV), or no growth value, of just $8/share.
Figure 5 details the differences between Salesforce's Core Earnings and GAAP Earnings.
Figure 5: Salesforce's GAAP Earnings to Core Earnings Reconciliation: TTM Through 2Q22
Total Earnings Distortion of $0.80/share, which equals $793 million, is comprised of the following:
Reported Unusual Gains, Net = $0.69/per share, which equals $685 million and is comprised of:
Hidden Unusual Expenses, Net = -$0.04/per share, which equals -$41 million and is comprised of:
Tax Distortion = $0.15/per share, which equals $149 million
This article originally published on August 26, 2022.
Disclosure: David Trainer, Kyle Guske II, Matt Shuler, and Brian Pellegrini receive no compensation to write about any specific stock, style, or theme.
 Our Core Earnings research is based on the latest audited financial data, which is the calendar 2Q22 10-Q in most cases. Price data as of 8/12/22.
 Average overstated % is calculated as Street Distortion, which is the difference between Street Earnings and Core Earnings.
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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.