Street Earnings, as reflected in Zacks Earnings, are marketed as being adjusted to remove unusual income and charges. Core Earnings show Street Earnings fail to account for a material amount of unusual income and charges, which distorts investors’ view of profitability across the S&P 500. This report shows:
- the prevalence and magnitude of overstated Street Earnings in the S&P 500,
- why Street Earnings (and GAAP earnings) are flawed and not adjusted as promised, and
- five S&P 500 companies with overstated Street Earnings and an unattractive-or-worse Stock Rating.
212 S&P 500 Companies Overstate EPS by More than 10%
For 373 companies in the S&P 500, or 75%, Street Earnings are higher than Core Earnings for the trailing-twelve-months (TTM) ended 1Q24. In the TTM ended 2Q23, 370 companies overstated their earnings.
My Core Earnings research is based on the latest audited financial data, which is the calendar 1Q24 10-Q in most cases. Price data as of 5/16/24. QoQ analysis is based on the change since last quarter.
When Street Earnings are higher than Core Earnings, they are overstated by an average of 19%, per Figure 1.
Figure 1: Street Earnings Overstated by 19% on Average in TTM Through 1Q24
Average overstated % is calculated as Street Distortion, which is the difference between Street Earnings and Core Earnings.
The 373 companies with overstated Street Earnings make up 71% of the market cap of the S&P 500 as of 5/16/24, which is up from 70% in 4Q23.
Note that this analysis is based on my team analyzing the financial statements and footnotes for ~3,000 10-Ks and 10-Qs filed with the SEC after earnings season.
Figure 2: Overstated Street Earnings as % of Market Cap: 2012 through 5/16/24
For over a third of the S&P 500 (212 companies), Street Earnings are overstated by more than 10% vs. Core Earnings. These 212 companies make up 27% of the market cap of the S&P 500 as of 5/16/24. See Figure 3.
Figure 3: Overstated Street Earnings by > 10% as % of Market Cap: 2012 through 5/16/24
The Five Worst Offenders in the S&P 500
Figure 4 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 1Q24. “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 4: S&P 500 Companies with Most Overstated Street Earnings: TTM 1Q24
*Measured as Street Distortion as a percent of Street EPS.
Disclosure: David Trainer, Kyle Guske II, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.
Read the full article here
