4Q21 Earnings: Where The Street Is Too High & Who Should Miss

Wall Street analysts are too bullish on fourth quarter earnings expectations for most S&P 500 companies. In fact, the percentage of companies that overstate earnings is at its highest point since 2012 (earliest data available), which increases the likelihood of misses in the upcoming earnings season.

Wall Street analysts are ignoring unusual financial gains that are often hidden in the footnotes of public company filings. Many public companies have investments in other companies that have nothing to do with their core business and these investments can be large enough to affect earnings per share.  

During times of market volatility, a public company’s investments in non-core private and public companies can pose hidden risks that investors should be aware of. These investments can distort the company’s earnings and Wall Street’s earnings expectations and are more noticeable during a market downturn. 

The riskiest stocks are often the ones with the most overstated earnings per share. Recent market volatility makes stocks with overstates earnings per share very risky.

According to my analysis, Wall Street’s earnings expectations for Illumina Inc. ILMN (ILMN), Valero Energy Corp. (VLO), Gartner IT (IT) and News Corporation (NWSA) and Xcel Energy XEL (XEL) are bloated and these companies are likely to miss expectations when they report Q4 earnings over the coming weeks. 

There are 360 S&P 500 companies with overstated earnings, which comprise of 81% of the S&P 500’s market cap. There are 197 companies that have overstated its earnings by 10%.

This report shows:


  • the prevalence and magnitude of overstated Street Earnings[1] in the S&P 500
  • five S&P 500 companies with overstated Street estimates likely to miss 4Q21 earnings

Street Overstates EPS for 360 S&P 500 Companies – Most Since 2012

Over the trailing twelve-months (TTM) the 360 companies with overstated Street Earnings make up 81% of the market cap of the S&P 500, which is the highest share since 2012. See Figure 1. 

Figure 1: Overstated Street Earnings as % of Market Cap: 2012 through 11/16/21

When Street Earnings overstate Core Earnings[2], they do so by an average of 19% per company, per Figure 2. The overstatement was more than 10% of Street Earnings for 39% of companies.

Figure 2: S&P 500 Street Earnings Overstated by 19% on Average Through 3Q21[3]

Five S&P 500 Companies Likely to Miss Calendar 4Q21 Earnings

Figure 3 shows five S&P 500 companies likely to miss calendar 4Q21 earnings based on overstated Street EPS estimates. Below I detail the hidden and reported unusual items that have created Street Distortion, and overstated Street Earnings, over the TTM for Valero Energy VLO .

Figure 3: Five S&P 500 Companies Likely to Miss 4Q21 EPS Estimates

*Assumes Street Distortion as a percent of Core EPS is same for 4Q21 EPS as for TTM ended 3Q21.

Valero Energy: The Street Overstates Earnings for 4Q21 by $0.87/share

The Street’s 4Q21 EPS estimate of $1.41/share for Valero Energy is overstated by $0.87/share due, at least in part, to large gains on foreign currency contracts reported in “Other Income” that are included in historical EPS.

My Core EPS estimate is $0.54/share, which makes Valero one of the companies most likely to miss Wall Street analyst’s expectations in its 4Q21 earnings report. Valero Energy’s Earnings Distortion Score is miss and its Stock Rating is unattractive.

Unusual gains, which I detail below, materially increased Valero Energy’s 3Q21 TTM Street and GAAP earnings and makes profits look better than Core EPS. When I adjust for all unusual items, I find that Valero Energy’s 3Q21 TTM Core EPS are -$1.76/share, which is worse than 3Q21 TTM Street EPS of -$1.09/share and 3Q21 TTM GAAP EPS of -$1.08/share.

Figure 4: Comparing Valero Energy’s GAAP, Street, and Core Earnings: TTM as of 3Q21

Below, I detail the differences between Core Earnings and GAAP Earnings so readers can audit my research. I would be happy to reconcile my Core Earnings with Street Earnings but cannot because I do not have the details on how analysts calculate their Street Earnings.

Figure 5 details the differences between Valero Energy’s Core Earnings and GAAP Earnings.

Figure 5: Valero Energy’s GAAP Earnings to Core Earnings Reconciliation: 3Q21

More details:       

Total Earnings Distortion of $0.68/share is comprised of the following:

Hidden Unusual Gains, Net = $0.08/per share, which equals $33 million and is comprised of

  • $26 million in prior service credits in the TTM period based on $26 million reported in the 2020 10-K
  • $7 million in the TTM period based on $31 million in sublease rental income in the 2020 10-K.

Reported Unusual Gains Pre-Tax, Net = $0.44/per share, which equals $178 million and is comprised of

$204 million in “Other Income”[4] in the TTM period based on

$26 million contra adjustment for recurring pension costs. These recurring expenses are reported in non-recurring line items, so I add them back and exclude them from Earnings Distortion.

Tax Distortion = $0.16/per share, which equals $66 million

  • I remove the tax impact of unusual items on reported taxes when I calculate Core Earnings. It is important that taxes get adjusted so they are appropriate for adjusted pre-tax earnings.

Reported Unusual Expenses After-Tax, Net = -$0.01/per share, which equals -$3 million and is comprised of

-$3 million in income allocated to participating securities in the TTM period based on

Given the similarities between Street Earnings for Valero Energy and GAAP Earnings, my research shows both Street and GAAP earnings fail to capture significant unusual items in Valero Energy’s financial statements.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

[1] Street Earnings refer to Zacks Earnings, which are adjusted to remove non-recurring items using standardized assumptions from the sell-side.

[2] My firm’s Core Earnings research is based on the latest audited financial data, which is the calendar 3Q21 10-Q in most cases

[3] Average overstated % is calculated as Street Distortion, which is the difference between Street Earnings and Core Earnings.

[4] Valero Energy reports Other Income directly on the Income Statement but provides additional details in the footnotes of its financial filings. For instance, in 2Q21, Other Income includes, among other items, a $53 million gain due to foreign currency contract derivatives and a $62 million gain on the sale of a 24.99% membership interest in MVP.

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