While Street Earnings[1] overstate profits for the majority of S&P 500 companies, as shown in Street Earnings Overstated for 73% of S&P 500 in 1Q23, there are many S&P 500 companies whose Street Earnings are lower than their true Core Earnings[2].
This report shows:
- the frequency and magnitude of understated Street Earnings in the S&P 500
- five S&P 500 companies likely to beat 2Q23 earnings
Street EPS Are Lower Than Core EPS for 146 S&P 500 Companies
For 146 companies in the S&P 500, or 29%, Street Earnings are lower than Core Earnings in the TTM ended 1Q23. In the TTM ended 4Q22, Street Earnings were understated for 154 companies.
The 146 companies with understated Street Earnings represent 28% of the market cap of the S&P 500 as of 6/28/23, which is up from 25% in the TTM ended 4Q22.
Figure 1: Understated Street Earnings as % of Market Cap: 2012 through 6/28/23
Sources: New Constructs, LLC and company filings.
When Street Earnings are lower than Core Earnings, they are understated by an average of 21% per company, per Figure 2. For 10% of the S&P 500 (51 companies), Street Earnings are understated by more than 10% vs. Core Earnings.
Figure 2: Street Earnings Understated by 21% on Average in TTM Through 1Q23
Sources: New Constructs, LLC and company filings.
Five S&P 500 Companies Likely to Beat Calendar 2Q23 Earnings
Figure 3 shows five S&P 500 companies likely to beat calendar 2Q23 earnings because their Street EPS estimates are understated. Below we detail the hidden and reported unusual items that caused the understated Street Earnings in the TTM ended 1Q23 for Moderna Inc. (MRNA).
Figure 3: Five S&P 500 Companies Likely to Beat 2Q23 EPS Estimates
Sources: New Constructs, LLC, company filings, and Zacks
*Assumes Street Distortion as a percentage of Core EPS is the same in 2Q23 as the TTM ended 1Q23
Moderna Inc.: The Street Underestimates Earnings Expectations for 2Q23 by $1.44/share
The Street’s 2Q23 EPS estimate of -$3.97/share for Moderna is $1.44/share lower than our estimate for 2Q23 Core EPS of -$2.53/share. Large inventory write-downs and losses on purchase commitments included in historical EPS drive most of the difference between the Street and Core EPS estimates. After removing these unusual expenses, our analysis of the entire S&P 500 reveals Moderna as one of the companies most likely to beat Wall Street analysts’ expectations in its 2Q23 earnings report.
Moderna’s Earnings Distortion Score is Strong Beat and its Stock Rating is Attractive, in part due to its top-quintile return on invested capital (ROIC) of 178% and price-to-economic book value (PEBV) ratio of 0.5.
Below, we detail the unusual expenses that materially reduced Moderna’s TTM 1Q23 Street and GAAP Earnings. After removing all unusual items, we find that Moderna’s TTM Core EPS are $15.78/share, which is higher than the TTM Street EPS of $11.57/share and GAAP EPS of $11.65/share.
Figure 4: Comparing Moderna’s GAAP, Street, and Core Earnings: TTM Through 1Q23
Sources: New Constructs, LLC and company filings.
Figure 5 details the differences between Moderna’s Core and GAAP Earnings so readers can audit our research. Given the small difference between GAAP and Street Earnings, the adjustments that drive the difference between Core and Street Earnings are likely mostly the same.
Figure 5: Moderna’s GAAP Earnings to Core Earnings Reconciliation: TTM 1Q23
Sources: New Constructs, LLC and company filings.
More details:
Total GAAP Earnings Distortion of -$4.13/share, which equals -$1.7 billion, is comprised of the following:
Hidden Unusual Expenses, Net = -$4.57/per share, which equals -$1.9 billion and is comprised of:
- -$1.4 billion in inventory write downs in the TTM period based on
- -$148 million in 1Q23
- -$279 million in 4Q22
- -$333 million in 3Q22
- -$499 million in 2Q22
- -$617 million in losses on firm purchase commitments in the 2022 10-K
Reported Unusual Expenses Pre-Tax, Net = -$0.12/per share, which equals -$48 million and is comprised of:
- -$49 million in losses on investments in the TTM period based on
- -$35 million in 1Q23
- -$2 million in 4Q22
- -$4 million in 3Q22
- -$8 million in 2Q22
- $1 million in other income in the TTM period based on
- -$4 million in expenses in 1Q23
- $5 million in income in 3Q22
Tax Distortion = $0.55 per share, which equals $227 million
The $4.21/share of Street Distortion in the TTM ended 1Q23 highlights that Core Earnings account for a more comprehensive set of unusual items when calculating Moderna’s true profitability.
This article was originally published on July 5, 2023.
Disclosure: David Trainer, Kyle Guske II, Hakan Salt, and Italo Mendonça 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.