Why You Should Value the S&P Using “As Reported” Earnings Data
When people quote analyst earnings expectations, they are usually referring to “operating” earnings which adjusts “as reported” (GAAP) earnings for non-recurring items. People use operating earnings because they show a cleaner picture of results that is more comparable to past or future periods. If the charges are one-time in nature, they don’t necessarily have to be counted in future projections.
This makes sense for an individual company; however, when you look at the S&P 500 as a whole, it’s not so valid. That’s because when you aggregate the S&P 500, “unusual” charges end up becoming “usual” charges that should be expected to repeat in the future. One-time charges will come different companies in different periods, but in aggregate a baseline amount of charges should be counted on to detract from earnings.
As shown in the chart above, “as reported” earnings has consistently been below “operating” earnings for the last 25 years. In recessions, unusual charges tend to run at greater levels than in flush times, but unusual charges outweigh unusual gains even in boom times. In other words, you can count on one time charges happening in every period.
In the median trailing twelve month period, as reported earnings trail operating earnings by 10%. That’s the “usual” amount of “unusual” charges. Because unusual charges do fluctuate, it might make sense to normalize operating earnings by adjusting them lower by 10%, but it doesn’t make sense to leave operating earnings alone completely because that assumes that these one time charges wont keep happening.
If you adjust by 10%, adjusted operating earnings would still be higher than as reported earnings during recessions (when one-time charges tend to run higher), but adjusted operating earnings would be lower than as reported earnings during booms when one time charges tend to be less prevalent. This methodology is more consistent with why analysts are excluding one-time charges to begin with. Currently, as reported earnings are only 7% below operating earnings ($103.68 vs. $111.67), which suggests that the “normalized” earnings number for the S&P 500 should be lower than as reported earnings.
This has important implications for market valuation metrics. Forward earnings multiples are based on operating earnings as well. “Non recurring” charges represent the difference between the S&P selling for 17.2x operating earnings and 18.5x as reported earnings. If normalized earnings are assumed to be 10% less than the value of operating earnings, then current normalized earnings are $100.50, which means the S&P 500 trades for 19.1x.
Recommended for You
ANKARA, Turkey (AP) — Russian President Vladimir Putin on Saturday called for sanctions against Turkey, following the downing this week by Turkey of a Russian warplane.Associated Press47 mins ago
The median price for single-family homes in Los Angeles County, based on more than 4,800 sales, was $510,000 in October, according to CoreLogic. But how much house does half a million dollars buy? Here’s ...Los Angeles Times
These retailers have had terrible years, which raises the stakes considerably for them this holiday season.TheStreet.com
The suspect was wearing a shirt from the security company that owned the truck, Loomis Armored.USA TODAY
Here's a closer look at five dividend stocks that Paulson & Co. owned in the most recently reported quarter.TheStreet.com
With cutthroat competition for talent and a sizzling job market in Silicon Valley and beyond, tech companies are in all-out combat mode to come up with benefits that attract and retain employees by pretty ...San Jose Mercury News
Giant corporations take up most of the financial media's time. That's unfortunate, because this little-known dividend stock has averaged total returns of 16.8% a year over the last 12 years.TheStreet.com
Oil's low prices have stuck around much longer than so many originally thought. Now, more than a year later, we're starting to see companies buckle under the pressure. Our energy team looks at the implications and the lesson to learn from these companies' demise. This podcast was recorded on…The Motley Fool Videos
Ever wonder why some tax returns are eyeballed by the Internal Revenue Service while most are ignored? Short on personnel and funding, the IRS audited only 0.86% of all individual returns in 2014. And ...Kiplinger
Ahead of OPEC’s meeting next week, Iran sweetens the deal for foreign oil companies as tries to attract over $100 billion in order to raise production by over 1 million barrels per dayOilprice.com
Colorado has constantly been in the news regarding its recent overhaul on the legislature allowing for personal recreational use of marijuana. As Ohio has cast their vote determining their citizens were wary of following in Colorado's footsteps, it could very well set into motion a path for other…The Motley Fool Videos
A host of big economic events is coming our way next week, so get your rest. And if you’re bummed that parts of Wall Street are calling for a dull year for U.S. stocks next year, then look to this part ...MarketWatch
My husband died at 60. I started collecting his Social Security. What's my next step?USA TODAY
These three income generators are currently under-appreciated, which makes them great bargains for yield-hungry investors who act now.TheStreet.com
One of the most bullish Wall Street strategists just offered one of the most bearish outlooks for 2016 we've read yet
BMO Capital Markets' Brian Belski is preparing clients for a stock market correction sometime in...Business Insider
Add attempts to roll back Wall Street reform to the list of things that might cause a government shutdown next month, when Congress comes to grips with the need to pass an omnibus government spending bill before a December 11 deadline. Treasury Secretary Jack Lew on Wednesday wrote an op-ed for…The Fiscal Times
Half of the gold coming from mines may not be viable at current prices, underscoring the industry’s need for consolidation and output cuts, according to the best-performing producer of the metal in the ...Bloomberg
There are relatively safe utility stocks with dividend yields similar to investment grade bonds and potential stock returns as good as or better than the S&P 500.TheStreet.com