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The Difference Between GAAP And Non-GAAP Q3 EPS For The Dow Jones Was 16%

Courtesy of ZeroHedge. View original post here.

The last time we looked at the near-record difference between GAAP and non-GAAP Dow Jones earnings, we found that it had crept to a (virtually) unprecedented 25%. To be sure, that was exactly one year ago, when the economy was perceived as being in worse shape than it is now, thanks to the narrative of a "global coordinated recovery" which is really just record central bank liquidity injections, and Chinese credit creation, both of which have recently hit the brakes.

That said, going back to the question of GAAP vs non-GAAP divergence, one would assume that in light of the so-called global recovery of 2017, company earnings would be more real and not the "pro forma, one-time, non-recurring" fabrication that US corporations are so fond of. Alas, one would be wrong.

As Factset's John Butters writes in a recent blog post, as of today, all of the companies in the Dow Jones Industrial Average (DJIA) have reported actual EPS for Q3 2017, which brings up several questions: what percentage of these companies reported non-GAAP EPS for Q3 2017? What was the average difference and median difference between non-GAAP EPS and GAAP EPS for companies in the DJIA for Q3 2017? How did these differences compare to recent quarters?

Here are the answers:

For Q3 2017, 21 (or 70%) of the 30 companies in the DJIA reported non-GAAP EPS in addition to GAAP EPS for the third quarter. Of these 21 companies, 16 (or 76%) reported non-GAAP EPS that exceeded GAAP EPS. Over the past six quarters (Q1 2016 – Q2 2017) 68% of the companies in the DJIA reported non-GAAP EPS in addition to GAAP EPS and 80% of these companies reported non-GAAP EPS that exceeded GAAP EPS.

Thus, slightly more companies in the DJIA reported non-GAAP EPS in Q3 2017 relative to the average of the past six quarters, while slightly fewer companies in the DJIA reported non-GAAP EPS above GAAP EPS in Q3 2017 relative to the average over the past six quarters.

For Q3 2017, the average difference between non-GAAP EPS and GAAP EPS for all 21 companies was 284.1%, while the median difference between non-GAAP EPS and GAAP EPS for all 21 companies was 10.1%. The average difference between non-GAAP EPS and GAAP EPS for the DJIA was unusually large in the third quarter because of Merck. The company reported non-GAAP EPS of $1.11 and GAAP EPS of -$0.02 for the quarter. Thus, the percentage difference between non-GAAP EPS and GAAP EPS for Merck for Q3 exceeded 5000% (on an absolute basis).

So let's normalize: excluding Merck, the average difference between non-GAAP EPS and GAAP EPS for the remaining 20 DJIA companies was 15.8%. How does that number look in context: Over the past six quarters, the average difference between non-GAAP EPS and GAAP EPS for companies in the DJIA was 72.8%, while the median difference between non-GAAP EPS and GAAP EPS was 13.4%.

Finally, if one takes the average of the median DJIA median differences for the past 4 quarters (LTM), one gets just over 14% (and 15.8% if "normalizing" the latest quarter's data).

This means that while the forward non-GAAP P/E multiple may be 18x based on a 33.4 (non-GAAP) S&P EPS, if one assumes that roughly 14% of the latest earnings, and those projected for the next 5 quarters, are "fluff" then applying a 14% haircut to the forward consensus EPS of 143… 

… which amounts to 123 in EPS for the S&P500 – then the market's forward GAAP PE multiple is 21x. With the exception of the pre-dot com burst, the market's forward P/E multiple has never been that high.


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