Earnings: Where Street Estimates Are Too Low & Who Should Beat

While Street Earnings overstate profits for the majority of S&P 500 companies, as shown in Street Earnings Overstated for 73% of S&P 500 in 2Q22, there are many S&P 500 companies whose Street Earnings understate their true Core Earnings. Street Earnings refer to Zacks Earnings, which are adjusted to remove non-recurring items using standardized sell-side assumptions.

This report shows:

• the frequency and magnitude of understated Street Earnings in the S&P 500
• five S&P 500 companies with understated Street estimates likely to beat 3Q22 earnings

Street Understates EPS for 153 S&P 500 Companies

153 companies with understated Street Earnings represent 27% of the market cap of the S&P 500 as of 8/12/22, measured on a rolling four quarter basis. For comparison, 152 companies representing 27% of the S&P 500 market cap had overstated Street Earnings in the previous quarter.

Figure 1: Understated Street Earnings as % of Market Cap: 2012 through 8/12/22

When Street Earnings understate Core Earnings, they do so by an average of -15%, per Figure 2. Street Earnings understate by >10% for ~10% of S&P 500 companies. Average understated % is calculated as Street Distortion, which is the difference between Street Earnings and Core Earnings.

Figure 2: Street Earnings Understated by -15% on Average in TTM Through 2Q22

Five S&P 500 Companies Likely to Beat Calendar 3Q22 Earnings

Figure 3 shows five S&P 500 companies likely to beat calendar 3Q22 earnings because their Street EPS estimates are understated. Below I detail the hidden and reported unusual items that caused Street Distortion and understated Street Earnings in the TTM ended 2Q22 for SolarEdge (SEDG).

Figure 3: Five S&P 500 Companies Likely to Beat 3Q22 EPS Estimates

*Assumes Street Distortion as a percent of Core EPS equals the same percent in 3Q22 as the TTM ended 2Q22

SolarEdge Technologies: The Street Understates Earnings for 3Q22 by $0.30/share

The Street’s 3Q22 EPS estimate of $1.48 for SolarEdge understates my estimate for 3Q22 Core EPS of $1.78/share by $0.30/share. Large financial expense and exchange rate losses included in historical EPS drive the difference between the Street and Core EPS estimates and lead me to forecast SolarEdge as one of the companies most likely to beat Wall Street analysts’ expectations in its calendar 3Q22 earnings report. SolarEdge’s Earnings Distortion Score is beat. However, its Stock Rating is unattractive, which indicates that while the short-term likelihood of an earnings beat is high, the long-term risk/reward of the stock is unattractive.

Below, I detail the unusual expenses that materially reduced SolarEdge’s 2Q22 Street and GAAP Earnings. After removing all unusual items, I find that SolarEdge’s TTM 2Q22 Core EPS are $3.03/share, which is better than the TTM 2Q22 Street and GAAP EPS of $2.51/share.

Figure 4: Comparing SolarEdge’s Core, Street, and GAAP Earnings: TTM Through 2Q22

I detail the differences between Core Earnings and GAAP Earnings so readers can audit my research. I would be happy to reconcile Core Earnings with Street Earnings but cannot because I do not have the details on how analysts calculate their Street Earnings.

Figure 5 details the differences between SolarEdge’s Core Earnings and GAAP Earnings.

Figure 5: SolarEdge’s GAAP Earnings to Core Earnings Reconciliation: TTM Through 2Q22

More details:

Total Earnings Distortion of -$0.52/share, which equals -$29 million, is comprised of the following:

Hidden Unusual Expenses, Net = -$0.07/per share, which equals -$4 million and is comprised of

-$4 million in loss on disposal of assets and inventory write-downs in the TTM period based on

Reported Unusual Expenses Pre-Tax, Net = -$0.62/per share, which equals -$35 million and is comprised of

-$22 million exchange rate loss in the TTM based on a -$22 million loss in the 2021 10-K

-$15 million financial expenses in the TTM period based on

-$7 million in reported write downs in the TTM based on

$9 million hedging income in the TTM based on a $9 million gain in the 2021 10-K

Tax Distortion = $0.17/per share, which equals $9.7 million

The similarity between Street Earnings and GAAP Earnings for SolarEdge indicates that Street Earnings fail to account for most of the unusual items in GAAP Earnings, even as some of the unusual items are reported directly on SolarEdge’s income statement. Core Earnings on the other hand include a more comprehensive set of unusual items when calculating SolarEdge’s true profitability.

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