Q4 2021 results: where the street is too high and who should miss out

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This article was originally published on January 10, 2022.

Wall Street analysts are overly optimistic about fourth-quarter earnings expectations for most S&P 500 companies. In fact, the percentage of companies overstating earnings is at its highest level since 2012 (first available data) , which increases the likelihood of misses in the next earnings season.

This 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 4Q21 earnings.

Street overestimates EPS for 360 S&P 500 companies – most since 2012

Over the past twelve months (TTM), the 360 ​​companies with overstated street earnings account for 81% of S&P 500 market capitalization, the highest share since 2012. See Figure 1.

Figure 1: Overstated Street Revenues as % of Market Cap: 2012 to 11/16/21

Overstated Street Earnings as % of Market Cap

Overstated Street Earnings as % of Market Cap

New Constructions, LLC

When street income overestimates basic income[2], they do so on average by 19% per company, according to Figure 2. The overstatement was greater than 10% of street revenue for 39% of companies.

Figure 2: S&P 500 Street earnings overvalued by 19% on average through 3Q21[3]

Overstatement of S&P 500 Street earnings

Overstatement of S&P 500 Street earnings

New Constructions, LLC

Five S&P 500 companies at risk of missing 4Q21 results from the calendar

Figure 3 shows five S&P 500 companies likely to miss calendar 4Q21 earnings based on overstated street EPS estimates. Below, we detail the hidden and reported unusual items that created Street Distortion and overestimated Street Revenue, on the TTM for Valero Energy (VLO).

Figure 3: Five S&P 500 companies likely to miss EPS estimates in 4Q21

Five S&P 500 companies at risk of missing 4Q21 EPS estimates

Five S&P 500 companies at risk of missing 4Q21 EPS estimates

New Constructs, LLC Company and Zacks Filings

*Assuming street distortion as a percentage of base EPS is the same for 4Q21 EPS as for TTM ended 3Q21.

Valero Energy: The Street overvalues ​​4Q21 earnings by $0.87/share

The Street’s 4Q21 EPS estimate of $1.41/share for Valero Energy is overstated by $0.87/share due, at least in part, to large gains on foreign exchange contracts reported in “Other revenues” which are included in historical EPS.

Our base EPS estimate is $0.54/share, making Valero one of the companies most likely to miss Wall Street analysts’ expectations in its 4Q21 earnings report. Valero Energy’s earnings distortion score is unsatisfactory and its equity rating is unattractive.

Unusual gains, which we detail below, significantly boosted Valero Energy’s TTM Street and GAAP earnings in 3Q21 and drove earnings better than core EPS. When we adjust for all unusual items, we see Valero Energy’s 3Q21 TTM base EPS of -$1.76/share, which is worse than 3Q21 TTM street EPS of -$1.09/share. share and 3Q21 GAAP TTM EPS of -$1.08/share.

Figure 4: Valero Energy GAAP, Street and Core Earnings Comparison: TTM in 3Q21


Street Earnings VLO Core GAAP

New Constructs, LLC and Company Filings

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 Valero Energy’s basic earnings and GAAP earnings.

Figure 5: Reconciliation of Valero Energy’s GAAP results to basic results: 3Q21

VLO GAAP at basic reconciliation

VLO GAAP at basic reconciliation

New Constructs, LLC and Company Filings

More details

The total earnings distortion of $0.68/share includes the following:

Hidden Unusual Gains, Net = $0.08/per share, which equals $33 million and includes –

  • $26 million in past service credits during the TTM period based on $26 million reported in the 10-K 2020.
  • $7 million in the TTM period based on $31 million in rental income from subletting in the 2020 10-K.

Unusual earnings reported pre-tax, net = $0.44/per share, which equals $178 million and includes –

  • $204 million in “other income”[4] in the TTM period based on
  • $26 million counter-adjustment for recurring pension expense. These recurring expenses are reported in non-recurring line items, so we add them and exclude them from the revenue distortion.

Tax distortion = $0.16/per share, which equals $66 million

  • We remove the tax impact of unusual items from reported taxes when we calculate base earnings. It is important that taxes are adjusted so that they are appropriate for adjusted pre-tax profits.

Unusual expenses reported after tax, net = -$0.01/per share, which equals -$3 million and includes –

  • -$3 million in income attributed to equity securities during the TTM period based on

Given the similarities between STR Earnings for Valero Energy and GAAP Earnings, our research shows that STR Earnings and GAAP Earnings fail to capture material unusual items in Valero’s financial statements. Energy.

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

[1] Street revenue refers to Zacks revenue, which is adjusted to remove non-recurring items using standardized sell-side assumptions.

[2] Our core earnings research is based on the latest audited financial data, which corresponds to the 3Q21 10-Q calendar in most cases.

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

[4] Valero Energy reports other income directly in the income statement, but provides additional details in footnotes to its financial documents. For example, in 2Q21, other income includes, among other items, a $53 million gain from foreign exchange derivatives and a $62 million gain on the sale of a 24.99% stake in MVP.

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