14% Of S&P 500 Earnings Is "One Time Write Off" Vaporware
With everyone now well aware that revenues of S&P 500 companies have taken a turn for the worse and are declining for the second consecutive quarter (with well over a majority missing sellside estimates and trimming Q4 guidance), many are wondering: how can corporate EPS continue to grow, even if nominally? Are there really so many people left to be laid off? The answer, to the latter, is no, for the simple reason that it is not layoffs that have driven the upward persistency in corporate earnings. Then what has? Simple: when in doubt, "charge it" - this axiom seems to work not only for cash strapped consumers, but for corporations who know very well that when unable to satisfy earnings estimates using regular way earnings, companies can just write off "one time charges" and get the going concern EPS benefit for such an action.In fact, as the table below shows, a whopping 14% of all 'pro forma' 2012 EPS will be due to "one time write offs" - the highest proportion of total earnings since 2009!
Quarterly corporate write-offs since 2010 and projected:
And the long-term chart:
What is very clear is that of the 104 in pro forma EPS, a whopping 14% of this, or 14.06, is in accounting "one time write off" fudges which are merely creative accounting ways to get benefit for deteriorating operations, and which never manifest in the form of actual earnings or cash flows.
In other words, far from the touted adjusted EPS growth from 97.88 to 104 in 2012, which implies the S&P is oh so cheap at 1400, or under a 14x multiple, when one looks at real earnings pre-write offs which are not and have never been earnings, but are merely an accounting gimmick used and abused by every company since time immemorial, the real earnings in 2012 will be 89, which in turn means that the implied forward PE multiple is roughly 16x at the current market level: above historical average.
It also means that in 2012, GAAP EPS will grow by a tiny 2.7%, the bulk of which can be attributed to financial firm's loan loss reserve release, which is also a form of one-time EPS adjustment.
Finally, and proving that the real EPS trend has caught up with the decline in revenues, is that Q4 GAAP EPS of 22.00 are going to be down from Q3's 23.29, dashing all hopes of a surge in Q4 earnings net of every GAAP fudge imaginable.
And this is how companies perpetuate the myth that all is well on the bottom line, since top line growth is now dead as the twinkie, and only endlessly recurring "one time" adjustments are left.
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