The Difference Between GAAP And Non-GAAP Q3 Earnings For The Dow Jones Was 25%

Tyler Durden's picture

As of today, 95% of the companies in the S&P 500 have reported earnings for Q3 2016. 72% of the companies have reported earnings above the mean estimate and 55%of S&P 500 companies have reported sales above the mean estimate. More importantly, however, according to FactSet in Q3 the earnings recession officially ended after five consecutive quarters of EPS declines: for Q3 2016, the blended earnings growth rate for the S&P 500 is 3.0%. The third quarter marks the first time the index has seen year-over-year growth in earnings since Q1 2015 (0.5%).

That's the official version. The unofficial one is that of this 3% increase in EPS, half comes from buybacks, or a reduction in the number of shares outstanding, which according to Deutsche Bank contributed 1.6% to earnings growth in the third quarter.  As the chart below shows, this has been a recurring theme for the S&P, where buybacks have "added" between 1% and 2% to EPS "growth" every quarter going back at least to the start of 2012.

And then there was the very acute distinction between GAAP and non-GAAP, one of our favorite topics which we have covered going as far back as 2010, and more recently in February of this year.

In another report by FactSet, we find that as of today, all of the companies in the Dow Jones Industrial Average have reported EPS for Q3 2016. Factset then asks three questions:

  • What percentage of these companies reported non-GAAP EPS for Q3 2016?
  • What was the average difference and median difference between non-GAAP EPS and GAAP EPS for companies in the DJIA for Q3 2016?
  • How did these differences compare to last year?

For Q3 2016, 21 of the 30 companies in the DJIA (or 70%) reported non-GAAP EPS in addition to GAAP EPS for the third quarter. Of these 21 companies, 16 reported non-GAAP EPS that was higher than GAAP EPS.

The average difference between non-GAAP EPS and GAAP EPS for all 21 companies was 181.1%, while the median difference between non-GAAP EPS and GAAP EPS for all 21 companies was 10.4%.

The average difference between non-GAAP EPS and GAAP EPS for the DJIA was unusually large because of DuPont. For Q3 2016, DuPont reported non-GAAP EPS of $0.34 and reported GAAP EPS of $0.01. Thus, the percentage difference between non-GAAP EPS and GAAP EPS for DuPont for Q3 was 3300%. Excluding DuPont, the average difference between non-GAAP EPS and GAAP EPS for the remaining 20 DJIA companies was 24.7%.

How does this compare to the third quarter in 2015? Back in Q3 2015, 19 of the 30 companies in the DJIA (or 63%) reported non-GAAP EPS in addition to GAAP EPS for the quarter. Of these 19 companies, 16 reported non-GAAP EPS that was higher than GAAP EPS. The average difference between non-GAAP EPS and GAAP EPS for all 19 companies was 17.1%.

This means that the GAAP to Non-GAAP difference (excluding outliers), continues to grow, or as FactSet puts it, the average difference between non-GAAP EPS and GAAP EPS for the Dow 30 was larger in Q3 2016 relative to Q3 2015. However, the median difference between non-GAAP EPS and GAAP EPS for the Dow 30 in Q3 2016 was nearly equal to the median difference in Q3 2015. While more DJIA companies reported non-GAAP EPS in Q3 2016 (21) compared to Q3 2015 (19), the same number of DJIA companies (16) reported non-GAAP EPS that exceeded GAAP EPS in both quarters.

* * *

Putting all this together, the distinction for year-over-year earnings growth for GAAP vs non-GAAP Dow Jones earnings is simple: non-GAAP Dow Jones earnings rose 10.8%, while GAAP EPS declined 3.7%:

Companies in the DJIA reported higher average and median year-over-year growth in non-GAAP EPS compared to GAAP EPS for Q3 2016. For the 21 companies in the DJIA that reported non-GAAP EPS for Q3 2016, the average non-GAAP EPS growth rate was 10.8%, while the median non-GAAP EPS growth rate was 5.1%. For these same 21 companies, the average GAAP EPS growth rate for Q3 2016 was -3.7%, while the median GAAP EPS growth rate for Q3 2016 was -1.2%.

There's more.

As Deutsche Bank writes in a note on Friday afternoon, "be mindful of the gap between GAAP and non-GAAP EPS and net margins"

The German bank explains that over the past two years, the wider than usual spread between GAAP and non GAAP is from asset write-downs at Energy and Materials companies. Outside those sectors, the spread at ~87% excluding huge discontinued operations and one-time gains at Health Care, modestly below normal. The overall spread bottomed at 68% in 4Q15 and subsequently improved to ~81% in the past two quarters and ~84% QTD.

In addition to write-downs, stock option expense (SOE) is often excluded by new Tech, bio Tech and some tech oriented consumer stocks. 42 S&P companies exclude SOE from their non-GAAP EPS, and that SOE would have had $1.07/sh impact to S&P EPS. Also, when M&A activity is strong there are often deal and integrations costs that are excluded. This is mostly at Tech and Health Care. Pension charges are sometimes excluded. This was a big item in 4Q14 and will likely be so again in 4Q16.

Some additional details from DB:

The chart below shows a long-term chart showing the divergence between the S&P500's LTM EPS on a GAAP vs non-GAAP basis...

... and finally, here is the implied LTM P/E multiple if using Friday's S&P closing price: it amounts to 18.7x for non-GAAP earnings, and 23.4x for GAAP.

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Whatta's picture

Bullish! Off to DJIA 22,000

And couple with the repatriation of offshore money buybacks coming, maybe 25,000 by this time next year!

Then the TrumpFest infrastructure spending, DIA 30,000 and MOAR!!!

Party on, earnings not required.

Draybin Deffercon III's picture
Draybin Deffercon III (not verified) Whatta Nov 19, 2016 9:24 PM

GAP(GPS) is looking like its rolling over again. Sell down to $24.30.

philipat's picture

GAAP is the only thing that really matters. It is also referred to as "As reported" because US reporting standards still require the use of those old-fashined accounting standards and practises. Any article which refers to Non-GAAP EPS, which is most eminating from the Wall Street sell side analysts, should be called out for the BS that it is.

PlayMoney's picture

GAAP don't mean shit to a headline driven bot.

Yen Cross's picture

   Now we're talking!!!   Don't even get me started on guidance, and those " bought and paid for" credit ratings agencies<<<

Draybin Deffercon III's picture
Draybin Deffercon III (not verified) Yen Cross Nov 19, 2016 9:16 PM

Are chocolate coins a buy or a sell right now Yen? I really needz to know.

rccalhoun's picture

my dog is having a great year stock picking

dunce's picture

Generally accepted accouting procedures should very often be rejected because of the lattitude for misleading figures.

adr's picture

So publicly traded corporations actually didn't make anything at all? 

Color me shocked. 

Let's take Dick's Sporting Goods. 

$6.81 Billion in supposed revenue. 518 stores. Oh they claim the cost of goods sold was $4.34 billion giving them gross margin of 30%. BULLSHIT!!! I'd love to see my invoice with 30% to them. Minimum margin to Dick's is 50% from vendors with 60% being standard. I've outlined the selling to the store scam before. 

Math says to meet that level of revenue, each Dick's store must sell $36,000 in merchandise every single day. $36k 365 days straight. Each day that figure is missed, the missed sales must be added to the next. Sorry, ain't happening. Not on this planet. Average daily sales might be $3000 on a good day at an A level store. Barely enough to keep the lights on. 

Please go to a Dick's store and see if there is any way in hell $36k walked out those doors on an average Wednesday. Even if you spot Dick's $2 billion in web revenue, which isn't even close to realistic, each store still has to do over $25k a day. 

I don't care if it is GAAP or Non GAAP, the reported revenue alone is impossible. Even if it was, the largest sporting goods retailer in the world only sells close to $7 billion in merchandise. How the fuck do you get almost $150 billion in merchandise sold by the top five athletic corporations when the largest retailer who stocks products from a few hundred companies only manages to sell $7 billion in retail value? Huh? Can anyone answer that? 

Oh and that $7 billion at retail is only worth a little over $3 billion wholesale. Even if that $3 billion was only distributed between the too five companies, it is some fucking magic to stretch that $3 billion to $150 billion. Oh but 50% of revenue comes from outside the USA. Ok fine then the target is $75 billion. If the largest vendor buys $3 billion and there aren't many others. Where does the $72 billion left come from? 

It's all made up. ALL OF IT. 

Fed-up with being Sick and Tired's picture

You are absolutely correct. I know a pal, who worked for a Company in the Silicon Valley, that sold Disk Drives and Printers, and they "sold" product into Big Rig Trailers, right at quarter end...created UN-MAILED INVOICES...and then they BACKED UP those sales the following first week of the next quarter, begging Distributors to buy the product that they had never ordered the previous quarterly period. This is called fraud and it is happening every day.

1777's picture

GAAP is the accounting trick these companies/crooks use to suck millions of dollars out of an otherwise zombie company that survives on zero percent rates.

They have manipulated all the metrics now, GAAP, GDP calculation and others are used to suck value out of any system regardless of how well they're doing. It would have been called fraud but so many of them use it to feed at the trough. Its why no one that actually works in the US has any money and the people who DONT work are LOADED! Good question!

Ecclesia Militans's picture

If there is enough cash to buy back stock and stick it in Treasury then that's seems to me to be an efficacious use of cash in an era of negative interest rates.  And it's any company's discretion to use whatever basis of accounting they wish, GAAP or non-GAAP (which we used to call OCBOA) as long as it's disclosed in the footnotes.  Not sure what all the fuss is about.  Caveat emptor, amirite?

saveUSsavers's picture