4Q21 Earnings: Where The Street Is Too High & Who Should Miss

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Wall Street analysts are very upbeat on fourth-quarter earnings expectations for most S&P 500 companies. In fact, the percentage of companies that exceed earnings is at its highest point since 2012 (the earliest data available), increasing the likelihood of defaults in the upcoming earnings season.

Wall Street analysts are ignoring the unusual financial gains often hidden in the footnotes of public company filings. Many public companies have investments in other companies that have nothing to do with their core business and these investments can be large enough to affect earnings per share.

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In times of market volatility, a public company’s investment in non-core private and public companies can pose hidden risks that investors should be aware of. These investments can distort a company’s earnings and Wall Street earnings expectations and are more noticeable during a market downturn.

The stocks with the highest risk are often the highest earners per share. Recent market volatility makes stocks more risky than earnings per share.

According to my analysis, Wall Street’s earnings expectations for Illumina Inc.
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(ILMN), Valero Energy Corp. (VLO), Gartner
This
(IT) & News Corporation (NWSA) & Xcel Energy
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(XEL) is bloated and these companies are likely to miss expectations when they report Q4 earnings in the coming weeks.

There are 360 ​​S&P 500 companies that have under-reported earnings, which account for 81 percent of the market cap of the S&P 500. There are 197 companies that have increased their earnings by more than 10%.

This report shows:

  • The prevalence and magnitude of excessive street income[1] S&P 500. In
  • Five S&P 500 companies likely to miss 4Q21 earnings with Street estimates

360 Street Overstate EPS for S&P 500 Companies – Highest Since 2012

During the last twelve months (TTM), 360 companies with high street earnings made up 81% of the market cap of the S&P 500, the highest share since 2012. See Figure 1.

Figure 1: Street Earnings as a % of Market Cap: Extended from 2012 to 11/16/21

When Street Income Exceeds Core Income[2], they do so by an average of 19% per picture 2 per company. Overstatements accounted for more than 10% of Street earnings for 39% of the companies.

Figure 2: S&P 500 Street earnings averaged over 19% through 3Q21[3]

Five S&P 500 companies likely to decline calendar 4Q21 earnings

Figure 3 shows five S&P 500 companies likely to miss calendar 4Q21 earnings based on Street EPS estimates. I’ll elaborate below hidden and reported Unusual Items on TTM for Valero Energy That Have Driven Street Distortion, and Street Earnings
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Figure 3: Five S&P 500 Companies May Miss 4Q21 EPS Estimates

*Assume Street Distortion as a percentage of Core EPS is the same for 4Q21 EPS that ended TTM 3Q21.

Valero Energy: The Street Raises Earnings of $0.87/Share for 4Q21

The Street’s 4Q21 EPS estimate for Valero Energy is higher at $0.87/share, at least in part, thanks to large gains on foreign exchange contracts reported in “other income,” which are included in historical EPS.

My core EPS is estimated at $0.54/share, which makes Valero one of the companies most likely to miss Wall Street analyst expectations in its 4Q21 earnings report. Valero Energy has a missed earnings distortion score and its stock rating is unattractive.

Unusual gains, which I’ll detail below, materially increased Valero Energy’s 3Q21 TTM Street and GAAP earnings, and profit looks better than core EPS. When I adjust for all unusual items, I find that Valero Energy has 3Q21 TTM Core EPS -$1.76/share, which is also higher than 3Q21 TTM Street EPS -$1.09/share and 3Q21 TTM GAAP EPS -$1.08/share is worse.

Figure 4: Valero Energy’s GAAP, Street and Core Earnings Comparison: TTM as of 3Q21

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

Figure 5 details the difference between Valero Energy’s core earnings and GAAP earnings.

Figure 5: Valero Energy’s GAAP Earnings to Core Earnings Reconciliation: 3Q21

more information:

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

Hidden abnormal profit, net = $0.08/per share, which equals $33 million and includes

  • $26 million in TTM period based on pre-service credit $26 million 2020 10-K . reported in
  • Based on $7 million in the TTM period $31 million Sublease Rental Income in 2020 10-K.

Reported abnormal profit pre-tax, net = $0.44/per share, which equals $178 million and includes

$204 million in “other income”[4] Based on TTM period

contract adjustment of $26 million for recurring pension cost, These recurring expenses are reported in a non-recurring line item, so I add them back up and exclude them from the income distortion.

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

  • When I calculate basic income, I remove the tax effect of unusual items on reported taxes. It is important that taxes be adjusted so that they are appropriate for adjusted pre-tax income.

Reported Abnormal Expenses After Tax, Net = -$0.01/Per Share, which equals and includes -$3 million

– $3 million in income allocated based on securities participating in the TTM period

Given the similarities between Street earnings for Valero Energy and GAAP earnings, my research shows that both Street and GAAP earnings fail to capture significant unusual items in Valero Energy’s financial statements.

Disclosure: David Trainor, Kyle Guske II and Matt Schuler receive no compensation for writing about any specific stock, genre, or topic.

[1] View Street Eye jax earnings, which are adjusted to remove non-recurring items from the sales side using standardized assumptions.

[2] My firm’s core earnings research is based on the latest audited financial data, which is in most cases calendar 3Q21 10-Q

[3] Average overstated % is calculated as street distortion, which is the difference between street earnings and core earnings.

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

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