S&P 500 Companies That Understated EPS By ~70% Post Q2'21

Summary

• Street Earnings (and GAAP earnings) are flawed. Fifty-two S&P 500 firms understate EPS by more than 10%.
• We provide a list of five S&P 500 companies with understated Street Earnings and an Attractive-or-better Stock Rating.
• We take a closer look at Molson Coors' understated Street Earnings.

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Misleading earnings beats continue in Q2''21. Operating Earnings from S&P Global 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 understated Street Earnings and an Attractive-or-better Stock Rating
• how Core Earnings and our Earnings Distortion factor generate alpha

Fifty-Two S&P 500 Firms Understate EPS by More than 10%

Per Figure 1, 25% of the S&P 500 companies have understated Street EPS over the trailing twelve months (TTM) through Q2'21^[1]. 10% have understated EPS by more than 10%. Overall, when companies understate earnings, they do so by an average of 23%.

Figure 1: Street Earnings Understate Earnings for 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 adjust GAAP Earnings for unusual gains and losses with the goal of focusing on the true earnings of companies. In reality, these adjusted earnings measures rarely, if ever, fully capture unusual items, which have a very material impact on results.

Per Figure 2 (from our report S&P’s “Operating Earnings” Remain Overstated in Q2'21) most investors are not aware that SPGI’s Operating Earnings suffer from significant flaws when compared to Core Earnings, because they exclude material unusual gains/losses missed by Wall Street. Professors from Harvard Business School and MIT Sloan published similar research in The Journal of Financial Economics.

Figure 2: Core Earnings vs. SPGI Operating : March 2020 to Present (through 8/18/21[3])

Sources: New Constructs, LLC, company filings, and S&P Global. Note: the most recent period’s data for SPGI’s Operating Earnings is based on consensus estimates for companies with a non-standard fiscal year.

Our Core Earnings analysis is based on aggregated quarterly data for the S&P 500 constituents in each measurement period.

Five S&P 500 Companies with the Most Understated Street Earnings

Figure 3 shows the S&P 500 stocks with an Attractive-or-better Stock Rating and the most understated Street Earnings (Street Distortion as a % of Street Earnings) over the TTM through Q2'21. Street Distortion equals the difference between Core Earnings per share and Street Earnings per share. Investors using Street Earnings miss the true profitability of these businesses.

Figure 3: S&P 500 Companies with Most Understated Street Earnings: TTM as of Q2'21

Sources: New Constructs, LLC and company filings.*Measured as Street Distortion as a percent of Street EPS

Next, for Molson Coors Beverage Company (TAP), we detail the hidden and reported unusual items missed by GAAP Earnings, Operating Earnings and Street Earnings[4]. All of these unusual items are captured in Core Earnings. 

Molson Coors’ TTM Q2'21 Street Earnings Understated by -$1.45/share

The Street Distortion, or difference between Molson Coors’ Street Earnings ($3.61/share) and Core Earnings ($5.06/share), is -$1.45/share, per Figure 4. Molson Coors’ GAAP Earnings are even more understated, at -$2.55/share. Street Earnings do a better job of capturing unusual items for Molson Coors than GAAP, but they still miss 40% of the unusual items in Core Earnings. Molson Coors’ Earnings Distortion Score is Beat.

Figure 4: Comparing Molson Coors’ GAAP, Street, and Core Earnings: TTM as of Q2'21

Sources: New Constructs, LLC and company filings.

Below, we detail the differences between Core Earnings and GAAP Earnings so readers can audit our research. We cannot reconcile Core Earnings to Street Earnings because we do not have the details as to exactly what makes Street Earnings differ from GAAP Earnings.

Figure 5: Molson Coors’ GAAP Earnings to Core Earnings Reconciliation

Sources: New Constructs, LLC and company filings.

More details[5][6]:

Hidden Unusual Gains, Net = $37 million or -$0.17/per share

• -$35 million in losses on sale or impairment of properties and other assets in the TTM period, based on
  • -$32 million in Q3'20
  • -$3 million in Q1'21
• -$2 million in one-time costs related to consultants, experts, and data recovery efforts in Q1'21
• $0.3 million in amortization of prior service costs in 2020

Reported Unusual Expenses, Net = -$1.6 billion or -$7.35/per share

• -$1.6 billion in reported assets write-downs in the TTM period, based on
  • -$30 million in Europe impairment losses in Q3'20
  • -$21 million in North America impairment losses in Q3'20
  • -$0.1 million in Europe asset abandonment in Q3'20
  • -$1.5 billion in Europe impairment losses in Q4'20
  • -$32 million in North America impairment losses in Q4'20
  • -$5 million in North America asset abandonment in Q4'20
  • -$3 million in Europe asset abandonment in Q4'20
  • -$3 million in North America asset abandonment in Q1'21
  • -$2 million in Europe asset abandonment in Q1'21
  • -$3 million in North America asset abandonment in Q2'21
  • -$3 million in Europe asset abandonment in Q2'21
• $44 million in other pension and postretirement benefits in the TTM period, based on
  • $8 million in Q3'20
  • $8 million in Q4'20
  • $13 million in Q1'21
  • $13 million in Q2'21
• -$43 million in employee related charges in the TTM period, based on
  • -$9 million in Q3'20
  • -$27 million Q4'20
  • -$4 million in Q1'21
  • -$4 million in Q2'21
• $0.6 million in termination fees and other gains in the TTM period, based on
  • -$0.1 million fees and losses in Q3'20
  • $2.6 million in fees and gains in Q4'20
  • -$2 million in fees and losses in Q1'21
• $0.3 million in other income in the TTM period, based on
  • $2 million in income in Q3'20
  • -$0.2 million in expenses in Q4'20
  • $1 million in income in Q1'21
  • -$3 million in expenses in Q2'21

• $3 million gain from foreign exchange and derivative activity in 2020
• $30 million contra adjustment for recurring pension costs. These recurring expenses are reported in non-recurring line items, so we add them back and exclude them from Earnings Distortion.

Tax Distortion = -$22 million or -$0.10/per share

• We remove the tax impact of unusual items on reported taxes when we calculate Core Earnings. It is important that taxes get adjusted so they are appropriate for adjusted pre-tax earnings.

Our research shows Molson Coors’ Street Earnings and GAAP earnings fail to capture a very material amount of unusual items reported directly on the income statement.

This article originally published on September 15, 2021.

Disclosure: David Trainer, Kyle Guske II, Alex Sword, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

[1] The most recent Core Earnings and Street Earnings values are based on the latest audited financial data from calendar Q2'21 10-Qs.

[2] Street Distortion is the difference between Street Earnings and Core Earnings. Average understated % is calculated as Street Distortion as a percent of Street Earnings.

[3] The earliest date that the Q2'21 10-Qs for all S&P 500 constituents were available.

[4] We cannot know precisely what is missed by other adjusted earnings measures because the details on how, precisely, they are calculated are not available.

[5] While we can explicitly reconcile Core Earnings to GAAP Earnings, we cannot do the same for Street Earnings because analysts do not publicly disclose what is captured in Street Earnings.

[6] For unusual items found only in the latest 10-K, we show the amount applied to our TTM calculation and link to the disclosure in the 10-K.