Expectation Versus Reality (Or Normalized Versus Methodology)
Operating earnings per share (EPS) is the dominant focus on the street. Equity analysts make their projections based on operating EPS, and most news reports cite them. In this case there are different versions of estimates. The two groups of estimates each have different functions and roles, similar to fundamental and technical analysis, and each group has its strengths. On an index level, a brokerage house may aggregate the S&P 500 earnings estimate based on the estimates supplied to it from their own covering analyst. Since estimates on issues differ, brokerage house index levels estimates differ as well (since their contributing analysts differ).
On a larger scale, several companies gather estimates and calculate a consensus estimate, which is widely reported in the press. S&P Capital IQ (CIQ) is one of the providers that gathers the estimates, so it can be used as an example. The CIQ numbers represent what the covering equity analysts are predicting at a certain point in time, meaning it is closely tied to the analysts’ current expectations and to the market. CIQ takes steps to ensure that when it calculates a consensus estimate for an issue, all of the analysts are predicting the same situation, meaning that if there is an item being excluded or included in the earnings, this is being done uniformly. For that reason, there may be 25 covering analysts but only 22 are used (typically the estimates are uniform).
The consensus number is the estimate which is used to determine a beat or miss. Generally, this estimate also shapes how the market initially reacts. Because of the nature of the market, analysts’ approach sometimes change their estimates, and an item in one industry may not be an item in another industry. Further, even within an industry there can be differences. Again, the strength and intent of the number is to show what analysts who cover that stock are currently thinking. Once the results are released, the number used for CIQ history is the one that matched up with the estimate. Therefore, if an item was excluded in the estimate, it will be excluded from the history. This process is known as ‘normalizing’
S&P Indices (which is separate from CIQ) uses a methodological approach to the S&P 500 earnings. In general, an item is included or excluded across all of the issues in the index. This permits comparisons of sectors and industries, and most of all, companies. Therefore, the result is also compatible with the index price, dividends, balance sheet items, etc. The strength of that number is its defined methodology, uniformity, and comparability–you know exactly what you are getting (there is no black box). Typically, the index level number is used on a higher level to analyze markets, sectors, and industries.
On an issue level, it permits comparison for screening and relative positions. However, many brokerage houses will note or modify certain S&P data on the lower-end (issue or group) so their specific approach to an issue can be incorporated (obviously, each house is slightly different). Since the index data are uniform and methodology-based, this adjustment can be done. The data can be thought of, in the context of building a house, as a series of 2’x8’ logs, each made with the same specifications. For most of the house, those uniform pieces would be exactly what one would want, but for parts of the house that log would need to be crafted. The good news is that the exact specifications of the log are known, so ‘crafting’ is possible.
| S&P Dow Jones Indices | |||
| S&P 500 Quarterly Earnings Per Share | |||
| QUARTER | OPERATING | OPERATING | % EPS |
| INDEX | CIQ | CIQ /IDX | |
| 12/31/2013 Prelim. | $28.24 | $28.45 | 0.76% |
| 9/30/2013 | $26.92 | $27.53 | 2.27% |
| 6/28/2013 | $26.36 | $26.92 | 2.12% |
| 3/30/2013 | $25.77 | $26.71 | 3.65% |
| 12/31/2012 | $23.15 | $26.36 | 13.85% |
| 9/28/2012 | $24.00 | $26.05 | 8.54% |
| 6/29/2012 | $25.43 | $25.67 | 0.95% |
| 3/30/2012 | $24.24 | $25.40 | 4.77% |
| 12/30/2011 | $23.73 | $24.46 | 3.10% |
| 09/30/2011 | $25.29 | $25.44 | 0.60% |
| 06/30/2011 | $24.86 | $25.46 | 2.43% |
| 03/31/2011 | $22.56 | $23.63 | 4.73% |
| 12/31/2010 | $21.93 | $22.58 | 2.97% |
| 09/30/2010 | $21.56 | $21.62 | 0.28% |
| 06/30/2010 | $20.90 | $21.36 | 2.19% |
| 03/31/2010 | $19.38 | $19.74 | 1.87% |
| 12/31/2009 | $17.16 | $16.53 | -3.65% |
This article was written by Howard Silverblatt, Senior Index Analyst, at S&P Dow Jones Indices.
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