While Street Earnings[1] overstate profits for the majority of S&P 500 companies, as shown in Street Earnings Overstated for Most S&P 500 Companies in 2021, there are many S&P 500 companies whose Street Earnings understate their true Core Earnings.
This report shows:
- the prevalence and magnitude of understated Street Earnings in the S&P 500
- five S&P 500 companies with understated Street estimates likely to beat 1Q22 earnings
- how Core Earnings[2] and our Earnings Distortion factor provide a new source of alpha.
Get our report on the S&P 500 companies more likely to miss 1Q22 Street EPS estimates here.
Street Understates EPS for 136 S&P 500 Companies – Least Since 2012
The 155 companies with understated Street Earnings represent 20% of the S&P 500’s market cap as of 3/11/22, which is the fourth-lowest percent since 2012 (earliest data available), measured with TTM data in each quarter.
Figure 1: Understated Street Earnings as % of Market Cap: 2012 through 3/11/22
Sources: New Constructs, LLC and company filings.
In the TTMs ended 3Q21 and for 2020 as a whole, Wall Street analysts understated earnings for 135 and 139 companies, respectively. When Street Earnings understate Core Earnings, they do so by an average of -12% per company, per Figure 2. Street Earnings understate Core Earnings by >10% for ~9% of S&P 500 companies.
Figure 2: Street Earnings Understated by -12% on Average in 2021[3]
Sources: New Constructs, LLC and company filings.
Five S&P 500 Companies Likely to Beat Calendar 1Q22 Earnings
Figure 3 shows five S&P 500 companies likely to beat calendar 1Q22 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 2021 for Akamai Technologies (AKAM). Contact us for the same details on the other companies.
Figure 3: Five S&P 500 Companies Likely to Beat 1Q22 EPS Estimates
Sources: New Constructs, LLC, company filings, and Zacks
*Assumes Street Distortion as a percent of Core EPS equals the same percent in 1Q22 as calendar year ended 2021
Akamai Technologies: The Street Understates Earnings for 1Q22 by $0.33/share
The Street’s 1Q22 EPS estimate of $1.42 for Akamai is understated by $0.33/share. The cause, at least in part, was large write-offs of unused computer and networking equipment that was included in historical EPS.
Based on how much our Core EPS estimate of $1.75/share exceeds the Street EPS estimate, Akamai is one of the companies most likely to beat Wall Street analysts’ expectations in its calendar 1Q22 earnings report. Akamai’s Earnings Distortion Score is Beat and its Stock Rating is Attractive.
Unusual expenses, which we detail below, materially reduced Akamai’s 2021 Street and GAAP Earnings and make profits look worse than Core EPS. Once all unusual items have been removed, we find that Akamai’s 2021 Core EPS are $5.72/share, which is better than the 2021 Street EPS of $4.74/share and 2021 GAAP EPS of $3.93/share.
Street Earnings clearly capture some unusual items, but the disconnect between Street and Core Earnings indicates that Street Earnings fail to capture all unusual items.
Figure 4: Comparing Akamai’s 2021 Core, Street, and GAAP Earnings
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 Akamai’s Core Earnings and GAAP Earnings.
Figure 5: Akamai’s GAAP Earnings to Core Earnings Reconciliation 2021
Sources: New Constructs, LLC and company filings.
More details:
Total Earnings Distortion of -$1.79/share, which equals -$296 million, is comprised of the following:
Hidden Unusual Expenses, Net = -$1.66/per share, which equals -$276 million and is comprised of:
- -$283 million write-off of computer and networking equipment and software no longer in use – Page 66
- -$13 million acquisition related costs – Page 36
- $21 million in sublease income – Page 78
Reported Unusual Expenses, Net = -$0.47/per share, which equals -$79 million and is comprised of
- -$70 million in amortization of debt discount and issuance costs
- -$11 million restructuring charge
- $2 million in other income
Tax Distortion = $0.35/per share, which equals $58 million
The gap between Street Earnings and GAAP Earnings for Akamai indicates that Street Earnings account for some of the unusual items in GAAP Earnings. However, the -$1.09/share Street Distortion in 2021 highlights that Core Earnings includes a more comprehensive set of unusual items when calculating Akamai’s true profitability.
This article originally published on April 8, 2022.
Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.
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[1] Street Earnings refer to Zacks Earnings, which are adjusted to remove non-recurring items using standardized sell-side assumptions.
[2] The Journal of Financial Economics features the superiority of our Core Earnings in Core Earnings: New Data & Evidence.
[3] Average understated % is calculated as Street Distortion, which is the difference between Street Earnings and Core Earnings.