The Mayan Calendar watchers at ZeroHedge have an interesting piece up regarding S&P 500 earnings. Long time readers will know the issue between GAAP EPS and NON-GAAP EPS, the latter of which now popular on Wall Street as it overstates profitability and allows companies to write off "one time" adjustments (that they use EVERY quarter i.e. option expensing). It has all become a big game really. While people wonder how "cheap" the market is they use the non-GAAP figures which can be very misleading.
While 2012 is not yet in the books, the % of profits that will be due to "one time adjustments" is looking to be on track for the highest level since 2009. Now, it is normal in a recession or just coming out of one to see major pro forma adjustments as operations are shuttered, massive layoffs are taken – these are true "one time adjustments", but most of what happens in positive GDP years are "accounting mechanisms". And you should not be seeing an increase in those type of adjustments in a normal growth year. As the charts below shows, if 2012 plays out as currently estimated….
…this will be the highest level of pro forma adjustments boosting S&P 500 earnings since the throes of the recession in 2009. A full 13.5% of the $104 in S&P 500 EPS will be due to these adjustments. As one can see below, if you take out these gimmicks and just look at the far left column, GAAP EPS is up a paltry 3% year over year and the multiple of the market at say 1400 on those $90 of earnings is 15.6x. Not exactly a bargain for such a slow growth environment. That said, we live in a world of pro forma as "hear no evil, see no evil" thinking pervades.
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