Earnings Q1’22: where street income is too high and who should miss out

shapecharge/iStock via Getty Images

Wall Street analysts are overly optimistic about first-quarter earnings expectations for most S&P 500 companies. At 79%, the percentage of S&P 500 companies whose Street EPS exceeds our Core EPS remains near record highs.

This the report shows:

  • the prevalence and magnitude of overstated street income[1] in the S&P 500
  • five S&P 500 companies with overstated Street estimates may miss 1Q22 earnings

Street overestimates the EPS of 336 S&P 500 companies

336 companies with overstated street earnings account for 79% of the S&P 500 market capitalization as of 3/11/22, which is the fifth highest percentage since 2012 (first available data), measured with TTM data from each quarter. Figure 1 shows that 79%, by market cap, of the S&P 500 have overstated street earnings for most of the past two years.

Figure 1: Overstated Street Earnings as % of Market Cap: 2012 to 3/11/22

Overstated Street Earnings as % of S&P 500 Market Cap

Overstated Street Earnings as % of S&P 500 Market Cap (New Constructs, LLC)

In the TTM ended 3Q21 and 2020 as a whole, Wall Street analysts overstated earnings for 360 companies and 351 companies, respectively. On average, Street Earnings overstate Core Earnings by 21% per company. See Figure 2. For more than a third of S&P 500 companies, street earnings overestimate core earnings by >10%.

Figure 2: Street revenues overestimated by 21% on average in 2021[2]

Street earnings overstated in the S&P 500

Street earnings overstated in the S&P 500 (New Constructs, LLC)

Five S&P 500 companies at risk of missing 1Q22 results from the calendar

Figure 3 shows five S&P 500 companies likely to miss calendar 1Q22 earnings based on overstated street EPS estimates. Below, we detail the hidden and reported unusual items that caused street distortion and overestimated street revenue in 2021 for Invesco Ltd. (IVZ) and Amazon.com (AMZN).

Figure 3: Five S&P 500 companies likely to miss 1Q22 EPS estimates

S&P 500 companies likely to miss out on earnings

S&P 500 companies likely to miss earnings (New Constructs, LLC)

*Assuming street distortion as a percentage of core EPS is the same for 1Q22 EPS as for the calendar year ending 2021.

Invesco Ltd: The Street overvalues ​​1Q22 earnings by $0.30/share

The Street’s 1Q22 EPS estimate of $0.69/share for Invesco Ltd. is overstated by $0.30/share due, at least in part, to gains on investments in the Consolidated Investment Product (CIP) included in Street’s historical EPS. Based on how much the Street EPS estimate exceeds our Core EPS of $0.39/share, we see Invesco as one of the S&P 500 companies most likely to miss Wall Street expectations. Invesco’s earnings distortion score is a strong fail and its equity rating is neutral.

Unusual gains, which we detail below, significantly boosted Invesco’s Street and GAAP earnings in 2021 and drove earnings better than core EPS. When we adjust for all unusual items, we find that Invesco’s 2021 base EPS is $1.76/share, which is worse than 2021 street EPS of $3.09/share and 2021 GAAP EPS $2.99/share.

Figure 4: Invesco GAAP, Street and Core Earnings Comparison: 2021

IVZ GAAP vs. Street Vs. Basic Income

IVZ GAAP vs. Street Vs. Basic Income (New Constructs, LLC)

Below, we break down the differences between base revenue and GAAP revenue so that readers can audit our research. We’d be happy to reconcile our base earnings with street earnings, but we can’t as we don’t have the details of how analysts calculate their street earnings.

Figure 5 details the differences between Invesco’s base earnings and GAAP earnings.

Figure 5: Reconciliation of Invesco GAAP Earnings to Base Earnings: 2021

Reconciliation of results between IVZ Core and GAAP

IVZ Core to GAAP Earnings Reconciliation (New Constructs, LLC)

More details:

The total earnings distortion of $1.23/share, or $573 million, includes the following:

Hidden Unusual Gains, Net =

Unusual earnings reported, net = $1.48/per share, which equals $690 million and includes

  • $509 million in other CIP income
  • $66 million in transaction, integration and restructuring benefits
  • $58 million gain on equity investments and total return swap, net
  • $57 million in “other realized capital gains”
  • $10 million gain on contingent consideration liability
  • $3 million net foreign exchange gains
  • -1 million dollars in out-of-service pension losses
  • -$5 million counter-adjustment for recurring retirement costs. These recurring expenses are reported in non-recurring line items, so we add them and exclude them from the revenue distortion.
  • -7 million dollars under “impairment other than temporary” expenses

Tax distortion = -$0.26/per share, which equals -$119 million

Given the similarities between Street Earnings and GAAP Earnings for Invesco, our research shows that Street Earnings and GAAP Earnings fail to capture material unusual items both hidden and reported directly in the account of Invesco results.

Amazon.com Inc: The Street overstates 1Q22 earnings by $3.71/share

Amazon.com, Inc. discloses unusual revenue directly on the income statement, which should make it easy for analysts to remove it from their estimates. However, the disconnect between street income and basic income reveals that the former lacks even this simple adjustment.

The Street’s 1Q22 EPS estimate of $9.33/share for Amazon.com is overstated by $3.71/share largely due to a stock valuation gain related to the IPO. Rivian’s stock market in 2021 which is included in Street’s historical EPS.

Based on how much the Street EPS estimate exceeds our Core EPS estimate of $5.62/share, we see Amazon as one of the S&P 500 companies most likely to miss Wall Street analysts’ expectations in its report on 1Q22 results. Amazon’s earnings distortion score is strong and its stock rating is unattractive.

Unusual gains, which we detail below, significantly boosted Amazon’s Street and GAAP earnings in 2021 and made earnings better than Core EPS. When we adjust for all unusual items, we find that Amazon’s 2021 Core EPS is $39.05/share, which is worse than the 2021 Street EPS and GAAP EPS of $64.78/share.

Figure 6: Amazon GAAP, Street, and Core Revenue Comparison: 2021

AMZN GAAP vs. Street vs. Core Earnings

AMZN GAAP vs. Street vs. Core Earnings (New Constructs, LLC)

Below, we break down the differences between base revenue and GAAP revenue so that readers can audit our research. We’d be happy to reconcile our base earnings with street earnings, but we can’t as we don’t have the details of how analysts calculate their street earnings.

Figure 7 details the differences between Amazon’s base revenue and GAAP revenue.

Figure 7: Reconciliation of Amazon’s GAAP Earnings to Baseline Earnings: 2021

Reconciliation of AMZN Core and GAAP results

AMZN Core to GAAP Earnings Reconciliation (New Constructs, LLC)

More details:

The total earnings distortion of $25.73/share, or $13.3 billion, includes the following:

Reported unusual earnings, net = $28.41/per share, which equals $14.6 billion and includes

  • $14.6 billion in “other income” carried over to the income statement

Tax distortion = -$2.68/per share, which equals -$1.4 billion

Amazon’s “other income” was reported directly in the income statement, so analysts should be able to easily identify such an unusual gain. Furthermore, on page 27 of its 2021 10-K, in the MD&A, management provides additional disclosure indicating that other income includes an $11.8 billion gain related to its stake in Rivian Automotive (RIVN), which went public in 2021.

Given the similarities between Street Revenue and GAAP Revenue for Amazon, our research shows that Street Revenue and GAAP fail to capture unusual items reported directly on Amazon’s P&L and therefore paint a misleading picture. the company’s profitability.

This article originally published on April 8, 2022.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation for writing about a specific stock, style, or theme.

[1] Street income refers to Zack’s Earningswhich are assumed to be adjusted to remove non-recurring items using standardized sell-side assumptions.

[2] The overestimated average % is calculated as street distortion, which is the difference between street income and base income.

Comments are closed.