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3Q21 Earnings: Where The Street Is Too Low & Who Should Beat

In theory, Wall Street analysts adjust EPS for unusual gains and losses that distort reported EPS. In reality, they do not. Street EPS estimates are materially misleading more often than investors realize[1].

The same is true for other well-known “adjusted” measures of earnings as I detail in S&P’s “Operating Earnings” Remain Overstated in 2Q21.

This report shows:

  • Five S&P 500 companies with understated Street estimates likely to beat 3Q21 earnings
  • Why Street Earnings, GAAP Earnings, and consensus estimates are flawed
  • How  Core Earnings and Earnings Distortion factor generate novel alpha

Street Understates EPS for 122 S&P 500 Companies

Per Figure 1, Street EPS understate Core EPS for 25% of S&P 500 companies for the trailing twelve months ended calendar 2Q21[2]. For 10% of S&P 500 companies, Street EPS are understated by more than 10% (examples are below).

Figure 1: Street Earnings Are Understated for a Large Amount of S&P 500 Companies

When the Street understates EPS, it does so by an average of -23% per company, see Figure 2.

Figure 2: Street Earnings Understate by -23% on Average

Five S&P 500 Companies Likely to Beat Calendar 3Q21 Earnings

Figure 3 shows five S&P 500 companies likely to beat calendar 3Q21 earnings based on understated Street EPS estimates. Below I detail the hidden and reported unusual items that have created Street Distortion, and understated Street Earnings, over the TTM for T-Mobile U.S. Inc (TMUS). 

Figure 3: Five S&P 500 Companies Likely to Beat 3Q21 EPS Estimates

*Assumes Street Distortion as a percent of Core EPS equals the same percent in 3Q21 as TTM ended 2Q21

T-Mobile: The Street Understates Earnings for 3Q21 by $0.45/share

The Street’s 3Q21 EPS estimate of $0.55 for T-Mobile is understated by $0.45/share due, at least in part, to large restructuring costs in historical EPS. My Core EPS estimate is $1.00, which makes T-Mobile one of the companies most likely to beat Wall Street analysts’ expectations in its calendar 3Q21 earnings report.

Unusual expenses, which I detail below, materially reduced T-Mobile’s 2Q21 TTM Street and GAAP Earnings and make profits look worse than Core EPS. When I adjust for all unusual items, I find that T-Mobile’s 2Q21 TTM Core EPS are $5.68, which is better than the 2Q21 TTM Street and GAAP EPS of $3.12.

Figure 4: Comparing T-Mobile’s Core, Street, and GAAP Earnings: TTM as of 2Q21

Below, I reconcile the differences between T-Mobile’s 2Q21 TTM Core EPS and GAAP EPS so readers can audit my work. Usually, I cannot reconcile Core EPS to Street EPS because I do not have the details as to exactly what makes Street EPS differ from GAAP EPS. However, given that Street and GAAP EPS are the same, Street EPS are likely missing the same unusual gains/losses as GAAP EPS.

Figure 5: T-Mobile’s GAAP Earnings to Core Earnings Reconciliation: TTM as of 2Q21

More details[3]:

Hidden Unusual Expenses, Net = -$3.22/per share, which equals -$4.0 billion and is comprised of:

-1.0 billion in merger costs recorded in selling, general, and administrative in the TTM period, based on

-$750 million in merger-related costs in the TTM based on -$1.5 billion in merger-related costs in 2020

-$732 million in merger costs recorded in cost of services in the TTM period, based on

-$612 million in restructuring plan expenses in the TTM period, based on

-$461 million in accelerating amortization expenses in the TTM, based on

-$229 million in COVID-19 costs in the TTM based on -$458 million in COVID-19 costs in 2020

-$118 million in transaction costs in the TTM period, based on

-$107 million in merger costs recorded in cost of equipment sales in the TTM period, based on

-$35 million non-cash impairment in 4Q20

$30 million gain on receivables in the TTM period, based on

Reported Unusual Expenses, Net = -$0.26/per share, which equals $326 million and is comprised of:

-$326 million in “other expenses” in the TTM period, based on

Tax Distortion = $0.91/per share, which equals $1.1 billion

  • I remove the tax impact of unusual items on reported taxes when I calculate Core Earnings. It is important that taxes get adjusted so they are appropriate for adjusted pre-tax earnings.

Disclosure: David Trainer, Kyle Guske II, Alex Sword, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

[1] The same is true for other well-known “adjusted” measures of earnings: S&P’s “Operating Earnings” Remain Overstated in 2Q21.

[2] The most recent Core Earnings and Street Earnings values are based on the latest audited financial data from calendar 2Q21 10-Qs.

[3] For unusual items found only in the latest 10-K, I show the amount applied to TTM calculation and link to the disclosure in the 10-K.

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