Where street estimates are too low and who should beat

While Street Earnings overestimate the earnings of the majority of S&P 500 companies, as shown by overestimated Street Earnings for 70% of the S&P 500 in 2Q23, there are many S&P 500 companies with lower Street Earnings to their basic profits.

This report shows:

• the frequency and magnitude of understated street profits in the S&P 500
• five S&P 500 companies expected to surpass 3Q23 profits

Street winnings refer to Zacks Earningswhich are adjusted to eliminate non-recurring items using standardized sell-side assumptions.

Street EPS is lower than core EPS for 136 S&P 500 companies

For 136 S&P 500 companies, or 27%, Street earnings trailed core earnings over the trailing twelve months (TTM) ended 2Q23. In the TTM completed in 1Q23, street profits were underestimated for 146 companies.

The percentage of the S&P 500 where Street earnings understate core earnings by more than 10% fell to 9% (47 companies) in 2Q23, down from 10% (51 companies) in the completed TTM in 1Q23.

These 47 companies represent 11% of the S&P 500 market cap as of 10/2/23, up from 10% of market cap in 1Q23 as measured with each quarter’s TTM data. See Figure 1.

Figure 1: Street Profits Understated by >10% as a % of Market Cap: 2012 through 10/23/23

The 136 companies with understated street earnings (by any amount) represent 29% of the S&P 500 market cap as of 2/10/23, up from 27% in TTM ended 1Q23. See Figure 2.

Figure 2: Understated Street Profits as a % of Market Cap: 2012 through 10/23/23

When street income is lower than basic income, it is underestimated on average by 28%, according to Figure 3.

Figure 3: Street revenues underestimated by 28% on average over the last 12 months through 2Q23

Five S&P 500 Companies Likely to Beat 3Q23 Results

Figure 4 shows five S&P 500 companies likely to beat 3Q23 calendar earnings because their Street EPS estimates are understated. Below I detail the hidden and reported unusual items that caused street earnings to be understated in TTM ended 2Q23 for American Tower Corp (AMT).

Figure 4: Five S&P 500 Companies Likely to Beat 3Q23 EPS Estimates

*Assumes street distortion as a percentage of base EPS is the same in 3Q23 as TTM ended in 2Q23.

American Tower Corp: The Street Underestimates 3Q23 Profits by 111%

The Street’s 3Q23 basic EPS estimate of $2.18/share for American Tower Corp is $2.41/share lower than my estimate for 3Q23 basic EPS of $4.59/share. Significant foreign exchange losses and impairment charges included in historical EPS account for most of the difference between Street EPS and baseline EPS estimates. After removing these unusual expenses, my analysis of the entire S&P 500 finds that American Tower Corp is one of the companies most likely to beat Wall Street analysts’ expectations in its 3Q23 earnings report.

American Tower Corp’s Earnings Distortion Score Beats. Despite a short-term probability of exceeding profit expectations, AMT does not provide quality risk/reward in the long term. American Tower’s stock rating is unattractive, in part due to its low return on invested capital (ROIC) of 5%, negative economic earnings, and market-implied growth appreciation period (GAP). > 100 years old.

Below, I detail the unusual expenses that significantly reduced American Tower’s GAAP and TTM earnings in 2Q23. After removing all unusual items, I see that American Tower’s TTM Core EPS is $4.36/share, which is higher than the TTM Street and GAAP EPS of $2.07/share.

Figure 5: American Tower GAAP, Street and Core Earnings Comparison: TTM through 2Q23

Figure 6 details the differences between American Tower’s TTM Core and GAAP earnings so readers can audit my research. Given the small difference between GAAP and Street earnings, the adjustments that determine the difference between core earnings and Street earnings are likely essentially the same.

Figure 6: American Tower GAAP to Core Earnings Reconciliation: TTM 2Q23

More details:

The total GAAP earnings distortion of -$2.29/share, or -$1.1 billion, includes the following:

Hidden unusual expenses, net = -$0.18/per share, which equals -$85 million and includes:

-$85 million in acquisition and merger spending and integration costs over the TTM period based on

Unusual expenses reported before taxes, net = -$2.27/per share, which equals -$1.1 billion and includes:

-$656 million of impairment charges in the TTM based on a charge of -$656 million in the 10-K 2022

-$376 million in “other expenses” (which are primarily foreign exchange gains/losses) during the TTM period, based on

-$28 million loss on sale or disposition of assets in TTM based on -$28 million loss in 10-K 2022

-$0.7 million loss on withdrawal of long-term bonds during the TTM period based

Tax distortion = $0.17 per share, which equals $78 million

Street Distortion’s $2.29/share in TTM ended 2Q23 highlights that core earnings account for a more comprehensive set of unusual items when calculating American Tower’s true profitability.

Disclosure: David Trainer, Kyle Guske II, Hakan Salt, and Italo Mendonça receive no compensation for writing on any specific title, style, or theme.