We are surprised to see so many analysts and portfolio managers discussing the first quarter's earnings for the S&P 500. Almost everyone believes that the earnings have come in above the forecasts and the only disappointment came from revenue shortfalls.
We wrote a report on April 16th (the beginning of 2009 first quarter earnings announcements) about a discussion in the Wall Street Journal on whether the $13 of estimated "operating" earnings for the first quarter would hold up. We concluded that the earnings would not match the estimate and we quote from the comment, "we don't expect them to reach the $13 estimated for the first quarter". Now that the earnings season has ended, the first quarter earnings are now a lot clearer and look to be just above $10. You can see these earnings estimates by clicking on this link --http://www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS .
You have to add up the four quarters in order to come up with the annual number. As you can see, the "operating" earnings for the first quarter have come up far short of the estimates and the "reported" earnings (the only ones that make any sense at all to us-see the special report on home page "What is the Real P/E?")-- have also come up short of expectations. They were expected to be about $9 in March and early April and they came in at $7.53.
Another thing we would like to point out, and that you can find on the same S&P website, is the discrepancy between the two sets of "operating" earnings for 2009 and 2010. S&P shows "operating" earning (which exclude write-offs) as both "top-down" and "bottom-up". Both of these "operating" earnings exclude write-offs. The top down numbers are reflective of the various strategists on Wall Street who look at the macro economic factors as well as profits and profit margins in general. The bottom-up methodology studies each stock in the S&P 500 by the analysts at S&P in conjunction with consensus estimates of Wall Street analysts. The "bottom-up" process is expecting the earnings to be about $56 (we are rounding all the numbers) in 2009, while the "top-down" methodology would have the earnings for 2009 at about $43. The real surprise, however, are the estimates for 2010. The bottom up approach has an estimate of about $74 while the top down has an estimate of $47. That is a $27 difference!! We believe the strategists will be too high but closer to reality than the analysts. This $47 number would still put the stock market at about a 20 multiple, and that multiple is associated more with stock market peaks than the norm or troughs.
As we have stated in many of our comments of the past, the only earnings that make any sense are "reported" earnings and the discrepancy there is incredible. Reported earnings were about $15 in 2008 relative to $50 of "operating" (bottom-up) in 2008. And "reported" earnings in 2009 are expected to be $29 and $38 for 2010. This means the difference between "reported" earnings and "operating" (bottom-up) earnings for 2008 was $35, in 2009 it is expected to be $27, and for 2010 it is expected to be $36. These differences total $98 of "write-offs" and will be excluded from the "operating" (bottom-up) earnings of $180 over the years 2008, 2009, & 2010 that are focused on by almost all of Wall Street. This also means that the $98 of write-offs which should be included in the "operating" earnings (meaning they would be reduced by that amount) over the past year, this year, and next is greater than the total of "reported" earnings of $82 ($15-2008, $29-2009, and $38 2010) over this same period!
We stay shocked that the analysts on Wall Street continue to focus on "operating" earnings. We now find it even more incredulous that the difference in the two earnings numbers total write offs over the years 2008, 2009, and 2010 are larger than the "reported earnings" for the same period. Also, the P/E on the "reported" earnings of 2008 of $15 is over 61, on estimated "reported" earnings of 2009 of $29 is over 35, and on estimated earnings of 2010 of $38 is over 24!!