Street Earnings, as reflected in Zacks Earnings, are marketed as being adjusted to remove non-recurring items. Our Core Earnings[1] show Street Earnings fail to account for a material amount of unusual items, 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
  • five S&P 500 companies with overstated Street Earnings and a Very Unattractive Stock Rating 

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Over 180 S&P 500 Companies Overstate EPS by More than 10%

For 339 companies in the S&P 500, or 68%, Street Earnings are higher than Core Earnings[2] for the trailing-twelve-months (TTM) ended 4Q22. In the TTM ended 3Q22, 339 companies also overstated their earnings.

When Street Earnings are higher than Core Earnings, they are overstated by an average of 19%, per Figure 1. For over a third of the S&P 500 (186 companies), Street Earnings are overstated by more than 10% vs. Core Earnings.

Figure 1: Street Earnings Overstated by 19% on Average in TTM Through 4Q22[3]

Sources:  New Constructs, LLC and company filings.

The 339 companies with overstated Street Earnings make up 74% of the market cap of the S&P 500 as of 3/8/23, which is down from 76% in 3Q22, measured with TTM data in each quarter.

Figure 2: Overstated Street Earnings as % of Market Cap: 2012 through 3/8/23

Sources:  New Constructs, LLC and company filings.

The Five Worst Offenders in the S&P 500

Figure 3 shows five S&P 500 stocks with a Very Unattractive Stock Rating and the most overstated Street Earnings (Street Distortion as a % of Street Earnings per share) over the TTM through 4Q22. “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: 2022

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

In the section below, we detail the hidden and reported unusual items that distort GAAP Earnings for Carrier Global Corp (CARR). All of these unusual items are removed from Core Earnings.

Carrier Global’s 2022 Street Earnings Overstated by $1.76/share

The difference between, or Street Distortion in, Carrier Global’s Street Earnings ($2.33/share) and Core Earnings ($0.57/share) is $1.76/share, or 76% percent of Street Earnings.

Carrier’s GAAP Earnings Distortion is even higher at $3.54/share, which indicates that Street Earnings are correctly identifying some non-operating and unusual items. However, given the disconnect between Street and Core Earnings, it’s clear that Street Earnings still miss material adjustments.

Figure 4: Comparing Carrier Global’s GAAP, Street, and Core Earnings: 2022

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 would be happy to reconcile our Core Earnings with Street Earnings but cannot because we do not have the details on how analysts calculate Street Earnings.

Carrier Global’s Earnings Distortion Score is Strong Miss and its Stock Rating is Very Unattractive. Carrier Global receives a Very Unattractive rating largely due to its low return on invested capital (ROIC) of 4% and the expensive valuation of its stock. Despite trading at $45/share CARR has an economic book value (EBV), or no-growth value, of -$16/share. Low ROIC and an expensive valuation land Carrier Global in our Most Dangerous Stocks Model Portfolio in March as well.

Figure 5 details the differences between Carrier Global’s Core Earnings and GAAP Earnings.

Figure 5: Carrier’s GAAP Earnings to Core Earnings Reconciliation: 2022

Sources:  New Constructs, LLC and company filings.

More details:

Total Earnings Distortion of $3.54/share, which equals $3.0 billion, is comprised of the following:

Hidden Unusual Gains, Net = $2.04/per share, which equals $1.8 billion and is comprised of:

Reported Unusual Gains Pre-Tax, Net = $2.13/per share, which equals $1.8 billion and is comprised of:

Tax Distortion = -$0.64/per share, which equals -$547.8 million

This article was originally published on March 24, 2023.

Disclosure: David Trainer, Kyle Guske II, and Italo Mendonça receive no compensation to write about any specific stock, style, or theme.

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[1] The Journal of Financial Economics features the superiority of our Core Earnings in Core Earnings: New Data & Evidence.

[2] Our Core Earnings research is based on the latest audited financial data, which is the calendar 2022 10-K in most cases. Price data as of 3/8/23.

[3] Average overstated % is calculated as Street Distortion, which is the difference between Street Earnings and Core Earnings.

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