S&P 500 companies likely to beat earnings estimates for 2Q22

While Street Earnings overstate profits for the majority of S&P 500 companies, as shown in Street Earnings Overstated for 67% of S&P 500 Companies in 1Q22, 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 nonrecurring items using standardized sell side assumptions.

This report indicates:

• the frequency and size of understated S&P 500 earnings.
• S&P 500 companies that are likely to beat analysts' expectations in the first quarter of 2019

Street Views 152 S&P 500 Companies as Undervalued

As of May 16, 2022, the market cap of the S&P 500 was 27% higher than it was at the close of 2021, measured on a four-quarter rolling basis. 152 companies with understated Street Earnings represent that increase in market cap.

The increase from the prior TTM period is driven largely by Microsoft and NVIDIA Corporation's (NVDA) Street Earnings swinging from overstated through 2021 to understated through 1Q22. Combined, these two companies make up 7% of the S&P 500 market cap through 5/16/22. In 2021 there were 155 companies that had understated Street Earnings for the year.

Figure 1: Market Cap as % of Understated Earnings from Street: 2012 to 5/16/22

In the first quarter of fiscal year 22, for each company in the S&P 500, Street Earnings underreported Core Earnings by an average of -27%, as shown in Figure 2. For nearly 10% of companies in the S&P 500, Street earnings were

The average street estimate for earnings in the TTM through 1Q22 was -28% lower than the actual figure.

Five S&P 500 Companies Expected to Report Higher Earnings in 2Q22

Figure 3 shows five S&P 500 companies likely to beat calendar 2Q22 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 in the TTM ended 1Q22 for Match Group MTCH and Long Idea The Hershey Company (HSY). Average understated % is calculated as Street Distortion, which is the difference between Street Earnings and Core Earnings.

Five S&P 500 companies are likely to beat their 2Q22 EPS estimates.

Street Distortion is assumed to be the same as it was in the TTM ended 1Q22, which is the same as it was at the end of

The Street understated earnings for the second quarter of 2018 by $1.08/share

The Street's 2Q22 EPS estimate of $0.68 for Match Group is understated by $1.08/share. The difference is driven by the large "other expense" included in historical EPS. My estimate for 2Q22 Core EPS of $1.76/share significantly exceeds the Street EPS estimate, leading me to forecast Match Group as one of the companies most likely to beat Wall Street analysts' expectations in its calendar 2

Unusual expenses, which I will explain in detail later, significantly reduced Match Group's TTM 1Q22 Street and GAAP earnings and made profits look worse than its Core EPS. After all the unusual items have been removed, I find that Match Group's TTM 1Q22 Core EPS are $2.31/share, which is better than the T&M 1Q22 Street EPS of $0.89/share and the TTM 1Q22 GAAP EPS of $0.92/share.

The large discrepancy between Street and Core Earnings indicates that Street Earnings do not capture all extraordinary items.

Figure 4: Comparing Match Group's Core, Street, and GAAP Earnings (TTM through 1Q22)

In the paragraph that follows, I explain the ways in which Core Earnings differ from GAAP earnings. It's important for readers to be able to check my research, so I've detailed these differences. If you want me to reconcile my findings with those of Wall Street analysts, I can't because I don't know how they calculate their figures.

The table in Figure 5 shows the differences between Match Group's core earnings and GAAP earnings.

Figure 5: Reconciliation of Match Group’s GAAP Earnings to Core Earnings, TTM Through 1Q22

The following financial figures represent the distortion of total earnings:

The company's reported unusual expenses pre-tax, net = -$1.50/share, which equals -$463 million and is composed of

-$463 million in other expenses over the last 12 months, as shown by

• The company made $1 million in revenue in the first quarter of 2018
• The company spent $39 million in the third quarter of fiscal year 21

Tax Distortion = $0.11/share, which is equal to $34 million

In the reporting period, the company's net loss was https://<a.com/b and amounted to -$509 thousand, which is made up of

• In the TTM period, $509 thousand in income was generated from $509 thousand in earnings from discontinued operations in 2Q21

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

The Hershey Company: Second-Quarter Earnings Estimated at $0.34/share

The Street's 2Q22 EPS estimate of $1.66 for The Hershey Company is understated by $0.14/share. The difference is driven by large write-downs of equity investments included in historical EPS. My estimate for 2Q22 Core EPS of $1.80/share significantly exceeds the Street EPS estimate, leading me to forecast The Hershey Company as one of the companies most likely to beat Wall Street analysts' expectations in its calendar 2Q22 earnings report. The Hershey Company's Earnings Distortion Score is beat and its Stock Rating is attractive.

The Hershey Company's TTM 1Q22 Street and GAAP earnings were reduced by unusual expenses, which I describe in the following paragraph. After these expenses have been removed, I find that the company's TTM 1Q22 core EPS are $8.44/share, which is better than the TTM 1Q22 Street and GAAP EPS of $7.79/share

The large gap between Street and Core Earnings indicates that Street earnings fail to capture all unusual items.

The Hershey Company's core, street, and GAAP earnings: TTM through 1Q22

In the following paragraph, I explain the differences between Core Earnings and GAAP Earnings so that readers can verify my research. I would be pleased to reconcile my Core Earnings with Street earnings if I could get a copy of how analysts compute their Street earnings, but as it is, that's not possible.

The differences between The Hershey Company's Core Earnings and GAAP Earnings are shown in Figure 7.

The following table shows the Hershey Company’s reconciliation of GAAP to core earnings for the trailing twelve months (TTM) ending in 1Q22:

For more information, see:

The following factors contribute to the total earnings distortion of -$0.65/share:

The net effect of the hidden unusual expenses was -$0.05/share, which is equal to -$11 million and includes

• In 1Q22, the company's cost of sales and selling, marketing, and administrative expenses were $1 million as a result of the business realignment activities.
• -$10 million in costs related to business realignment activities, including -$13 million in 2021.

For the period ended December 31, 2018, the Company reported unusual expenses of $136 million. This amount was calculated as a result of the following:

Write-downs of equity investments in partnerships qualifying for historic and renewable energy tax credits in the TTM period amounted to -$123 million, based on

• In 1Q22, the company's revenue was about $13 million
• Sales fell by $85 million in the last quarter of fiscal year
• In the third quarter of fiscal year 2019, our company's revenue decreased by
• In the second quarter of fiscal year 21,  5 million was spent

Non-service cost components of net periodic benefit costs in the TTM period, as a result of   

• $2 million saving in 1Q22
• In the fourth quarter of 2016, $1 million was spent
• The company spent $2 million in the third quarter of fiscal year 2021
• The company spent $2 million in the second quarter of fiscal year 21

In the TTM period, $3 million in business realignment costs were incurred as a result of

• In the fourth quarter of 2018, the company reported a loss of $1 million

Other expenses totaled $1 million in the TTM period, as a result of

$7 million contra adjustment for recurring pension costs. These recurring expenses are reported in nonrecurring line items, so I add them back and exclude them from Earnings Distortion.

The tax on stock transactions, which is $0.05 per share, amounts to $11 million

The similarity between Street Earnings and GAAP Earnings for The Hershey Group shows that Street Earnings fail to include most of the unusual items in GAAP earnings, even though most of the unusual items are reported on its income statement. Core earnings, in contrast, cover a lot more unusual items and enable my firm to estimate earnings more accurately for The Hershey Group.

David Trainer, Kyle Guske II, Matt Shuler, and Brian Pellegrini do not receive any compensation for writing about any specific stock, style, or theme.