Earnings 2Q22: where street income is too high and who should miss out

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Wall Street analysts are overly optimistic about second-quarter earnings expectations for most S&P 500 companies. Although down from records set in recent quarters, the percentage of S&P 500 companies with Street EPS exceeds my company’s Core EPS remains high at 70%.

This report shows:

  • the frequency and magnitude of overstated street gains in the S&P 500
  • five S&P 500 companies with overstated Street estimates at risk of missing 2Q22 earnings

Street overestimates the EPS of 333 S&P 500 companies

333 companies with overstated street earnings represent 70% of S&P 500 market capitalization through 5/16/22, down from 79% through the end of 2021, measured on a rolling basis of four quarters.

The decline from the previous TTM period is largely due to lower street revenue for Microsoft
MSFT
(MSFT) and NVIDI
VIDI

NVDA

IAD
A corporation (NVDA). Together, these two companies represent 7% of the market capitalization of the S&P 500 as of 05/16/22. For comparison, in the 2021 calendar, 336 companies had overestimated street income.

Figure 1: Overstated Street Earnings as % of Market Cap: 2012 to 5/16/22

On average, Street Earnings overstate Core Earnings by 19% per company in 1Q22. 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 19% on average in TTM through 1Q22

Five S&P 500 companies at risk of missing out on 2Q22 earnings

Figure 3 shows that five S&P 500 companies are likely to miss calendar 2Q22 earnings because their street EPS estimates are overstated. Below I detail hidden and reported unusual items that caused street distortion and overstated street revenue in the TTM ended 1Q22 for Twitter
TWTR
(TWTR) and Tesla
TSLA
(TSLA), the former currently in acquisition talks with Elon Musk, the latter led by Elon Musk.

Figure 3: Five S&P 500 companies likely to miss 2Q22 EPS estimates

*Assuming street distortion as a percentage of base EPS is the same for 2Q22 EPS as for TTM ended 1Q22.

Twitter Inc: The Street overvalues ​​2Q22 earnings by $0.11/share

The Street’s 2Q22 EPS estimate of $0.14/share for Twitter is overstated by $0.11/share due, at least in part, to the inclusion of gains on Twitter’s sale of its business MoPub in January 2022 in Street’s historical BPA. Based on how much the Street EPS estimate exceeds my company’s Core EPS by $0.03/share, I consider Twitter to be one of the S&P 500 companies most likely to miss Wall Street’s expectations. Twitter’s earnings distortion score is a miss and its stock rating is very unattractive.

However, it’s important to note that Twitter’s missing earnings may not impact the stock as much as others, given that it trades more on acquisition prospects than fundamentals.

Unusual gains, which I detail below, significantly increased Twitters TTM 1Q22 Street and GAA
GAA
Profit P to make profits look better than Core EPS. Adjusting for all unusual items, I see Twitter’s TTM 1Q22 Core EPS at $0.05/share, which is worse than the 1Q22 Street TTM and GAAP EPS at $0.28/share.

Figure 4: Twitter GAAP, Street, and Core Revenue Comparison: TTM through 1Q22

Below, I detail the differences between base revenue and GAAP revenue so that readers can audit my research. I’d be happy to reconcile base income with street income, but I can’t because I don’t have the details of how analysts calculate their street income.

Figure 5 details the differences between Twitter’s base revenue and GAAP revenue.

Figure 5: Reconciliation of GAAP Earnings to Twitter Core Earnings: TTM through 1Q22

More details:

The total earnings distortion of $0.23/share, or $182 million, includes the following:

Hidden Unusual Gains, Net = $0.01/per share, which equals $7 million and includes

  • $7 million sublease revenue in TTM period based on $10 million sublease revenue in 10-K 2021

Unusual earnings reported, net = $0.37/per share, which equals $295 million and includes

$970 million gain on the sale of a group of assets in 1Q22 resulting from Twitter’s sale of its MoPub business to AppLovin Corporation

$91 million of other income in the TTM period based on

$766 million in litigation settlement costs in the TTM period based on a settlement of $766 million in 3Q21

Fiscal distortion = -$0.15/per share, which equals -$121 million

The similarities between Street Earnings and GAAP Earnings for Twitter indicate that Street Earnings lacks many unusual items in GAAP Earnings and Core Earnings includes a fuller set of unusual items when calculating the actual profitability of Twitter.

Tesla Inc.: The Street overstates 2Q22 earnings by $0.54/share

The Street’s 2Q22 EPS estimate of $2.07/share for Tesla is overstated by $0.54/share, largely due to automotive regulatory credits included in Street’s historical EPS.

Based on how much the Street EPS estimate exceeds the Core EPS estimate by $1.53/share, I see Tesla as one of the S&P 500 companies most likely to miss Wall Street analysts’ expectations. in its 2Q22 earnings report. Tesla’s earnings distortion score is strong.

Unusual gains, which I detail below, significantly boosted Tesla’s TTM 1Q22 Street and GAAP earnings and made earnings look better than Core EPS. When I adjust for all the unusual items, I see that Tesla’s TTM 1Q22 Core EPS is $5.46/share, which is worse than the TTM 1Q22 Street EPS of $7.37/share and the GAAP EPS of $7.40/share.

Figure 6: Tesla GAAP, Street, and Core Revenue Comparison: TTM through 1Q22

Below, I detail the differences between base revenue and GAAP revenue so that readers can audit my research. I’d be happy to reconcile base income with street income, but I can’t because I don’t have the details of how analysts calculate their street income.

Figure 7 details the differences between Tesla’s base earnings and GAAP earnings.

Figure 7: Reconciliation of Tesla GAAP Earnings to Core Earnings: TTM through 1Q22

More details:

The total earnings distortion of $1.94/share, or $2.2 billion, includes the following:

Hidden Unusual Gains, Net = $0.73/per share, which equals $823 million and includes

$947 million in automotive regulatory credits in the TTM period based on

-$124 million of write-downs of inventories and purchase commitments during the TTM period based on

Unusual earnings reported pre-tax, net = $0.68/per share, which equals $768 million and includes

$679 million in automotive regulatory credits in the TTM period based on

$163 million in other income in the TTM period based on

-$74 million in restructuring and other charges during the TTM period based on

Tax distortion = $0.54/per share, which equals $611 million

Given the similarities between street revenue and GAAP revenue for Tesla, my research shows that street revenue and GAAP fail to capture unusual items in footnotes and those reported directly on the income statement of Tesla and therefore give a misleading picture of the company’s profitability.

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

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