4Q21 Earnings: Where The Street Is Too Low & Who Should Beat

While Street Earnings[1] overstate profits for the majority of S&P 500 companies, as shown in S&P 500 Companies That Overstated EPS by Over 75% in 3Q21, there are also many S&P 500 companies whose Street Earnings understate their true profits.

This report shows:

• the prevalence and magnitude of understated Street Earnings in the S&P 500
• five S&P 500 companies with understated Street estimates likely to beat 4Q21 earnings

Street Understates EPS for 136 S&P 500 Companies – Least Since 2012

Over the trailing-twelve-months (TTM), the 136 companies with understated Street Earnings made up 19% of the market cap of the S&P 500, which is the lowest percent since 2012 (earliest data available). See Figure 1.

Figure 1: Understated Street Earnings as % of Market Cap: 2012 through 11/16/21

When Street Earnings understate Core Earnings[2], they do so by an average of -19% per company, per Figure 2. The understatement was more than 10% of Street Earnings for 8% of companies.

Figure 2: Street Earnings Understated by -19% on Average Through 3Q21[3]

Five S&P 500 Companies Likely to Beat Calendar 4Q21 Earnings

Figure 3 shows five S&P 500 companies likely to beat calendar 4Q21 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 Charter Communications (CHTR).

Figure 3: Five S&P 500 Companies Likely to Beat 4Q21 EPS Estimates

*Assumes Street Distortion as a percent of Core EPS equals the same percent in 4Q21 as TTM ended 3Q21

Charter Communications: The Street Understates Earnings for 4Q21 by $0.45/share

The Street’s 4Q21 EPS estimate of $6.94 for Charter is understated by $0.70/share due, at least in part, to large losses on extinguishment of debt and “special charges” in historical EPS. My Core EPS estimate is $7.64, which makes Charter one of the companies most likely to beat Wall Street analysts’ expectations in its calendar 4Q21 earnings report.

Unusual expenses, which I detail below, materially reduced Charter’s 3Q21 TTM Street and GAAP Earnings and make profits look worse than Core EPS. When I adjust for all unusual items, I find that Charter’s 3Q21 TTM Core EPS are $23.57/share, which is better than the 3Q21 TTM Street EPS of $21.40/share and 3Q21 TTM GAAP EPS of $21.54/share.

Figure 4: Comparing Charter’s Core, Street, and GAAP Earnings: TTM as of 3Q21

Below, I detail the differences between Core Earnings and GAAP Earnings so readers can audit my research. I would be happy to reconcile my 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 Charter’s Core Earnings and GAAP Earnings.

Figure 5: Charter Communication’s GAAP Earnings to Core Earnings Reconciliation: TTM as of 3Q21

More details:

Total Earnings Distortion of -$2.03/share is comprised of the following:

Reported Unusual Expenses, Net = -$2.46/per share, which equals -$491 million and is comprised of:

-$282 million in special charges in the TTM period based on

-$273 million in other financing expenses in the TTM period based on

-$100 million loss in the TTM based on a -$55 million loss on foreign currency remeasurement of Sterling Notes to U.S. dollars reported in the 2020 10-K.

-$42 million loss on disposal of assets in the TTM period based on

-$9 million expense in the TTM based on -$31 million in “other expense” reported in the 2020 10-K.

$270 million gain in the TTM based on a $40 million gain on the change in fair value of cross currency derivative instruments in the 2020 10-K.

$93 million contra adjustment for recurring pension costs. These recurring expenses are reported in non-recurring line items, so I add them back and exclude them from Earnings Distortion.

$33 million in reported other non-operating income in the TTM period based on

$5 million gain in the TTM based on $32 million gain on sale of assets reported in the 2020 10-K.

Hidden Unusual Gains, Net = $0.20/per share, which equals $41 million and is comprised of

• $110 million in gains to offset impairments reported in prior 10-Qs but no longer disclosed separately in the 10-K.
• -$69 million in the TTM period based on -$277 million in estimated customer credits due to COVID-19 in the 2020 10-K.

Tax Distortion = $0.23/per share, which equals $45 million

• 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.

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

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

[1] Street Earnings refer to Zacks Earnings, which are adjusted to remove non-recurring items using standardized sell-side assumptions.

[2] My Core Earnings research is based on the latest audited financial data, which is the calendar 3Q21 10-Q in most cases

[3] Average understated % is calculated as Street Distortion, which is the difference between Street Earnings and Core Earnings.