Monday, July 27, 2009

S&P 500 Earnings

Surging Profit Estimates Signal 26% Rally for S&P 500

In the above linked article, the authors state that "Wall Street firms estimate the S&P 500 will earn $74.55 a share next year." They neglect to mention that this is on an OPERATING basis. It does not include items that are not perceived to be parts of everyday business, e.g. write-offs.

In my posts regarding equity valuation, I have been relying on S&P's own estimate of AS REPORTED earnings. My reasoning is that these write-offs have been so pervasive and consequential, that ignoring them would vastly overstate future earnings potential.

For calendar 2010, S&P estimates operating earnings of $74.01, not too far from the Street consensus. However, their as reported number comes in at $37.26. That is basically one-half of operating earnings. The below graph tracks the ratio of the reporting methods. You be the judge. (Note: my analysis consistently tracks historical as reported numbers, I NEVER combine apples & oranges.)

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