When it comes to the corporate bottom line, there is a reason why the smart money has long since given up on Net Income, Earnings Per Share or any other such equity-specific variant: it is the one metric traditionally gamed by management teams who know that legacy investors and algos look solely at EPS (whether it has beat or missed expectations) in making kneejerk reactions whether to buy or sell stock upon an earnings release, thus setting the momentum tone for the next quarter. Instead, what fixed income investors, the buyside in general, and what little is left of "sophisticated" traders have historically focused on is EBITDA, and in some special cases, such as the New Normal, when the bulk of corporate cash goes to fund buybacks, EBITDA per share (to normalize for TEV changes over time). The reason is that EBITDA ignores such balance sheet components as net interest (a key reason why companies are reporting better than expected EPS in a collapsing interest rate environment), as well as the corporate tax rate. In short: EBITDA is the closest non-GAAP indicator to actual cash flow and/or bottom line profit as one can get.
Which is why we thought most readers would be rather surprised to learn what the result of a simple Bloomberg query comparing S&P500 EBITDA per share (BBG mnemonic TRAIL_12M_EBITDA_PER_SHARE) to the S&P looks like.
For one: not only is corporate LTM EBITDA per share not at all time highs (it is well off the record levels seen in 2008), but it is at levels last seen in January 2007.
But perhaps most surprising is what happens when on juxtaposes the S&P500's EBITDA level relative to the actual S&P. The stunning result is charted below:
[6]
If there is any good news in the chart above it is that EBITDA growth is still positive... Just barely. A chart showing the Year over Year change in LTM EBITDA shows the true story of the "recovery" - EBITDA per share growth, or true corporate bottom line growth, peaked in 2011, and has been declining ever since even as the actual number of shares has been collapsing due to the furious stock buyback activity everyone is well aware of.
[7]
At this rate we expect annual corporate cash flow growth to hit zero and turn negative in a few short months. We can't wait to see how this particular collapse in corporate fundamentals is spun roughly at the time the S&P is expected to hit 1750.