S and P Core Earnings — What Are They

Jan 30, 2024 By Triston Martin

The after-tax profits from a company's core business activities are known as S&P Core Earnings. Unlike net income, they don't take into account rare events that have little to do with the regular operations of the firm. For obvious reasons, Standard & Poor's (S&P) developed Core Earnings in 2002. These adjustments make it simpler to compare the success of one period to another by eliminating the impact of unusual events, which can have a positive or negative effect on overall results.

A Guide to the S&P 500's Core Earnings

As defined by Generally Accepted Accounting Principles, net income is the starting point for the S&P Core Earnings computation. The net income is then revised for retirement plans, employee stock options, R&D, and restructuring.

Stock options may be essential to an employee's total pay package at some organizations. As stock options are an expense that cuts into a company's earnings, S&P Core Earnings are a more realistic reflection of actual expenses in certain situations.

What Are Core Earnings?

Profits from a company's core operation are called "core earnings," They are calculated by excluding certain costs associated with those activities, as well as any one-time or unusual sources of revenue or costs. Management and investors use core profits as a non-GAAP earnings measure to determine the underlying business's profitability and to search for ways to cut back on or eliminate the company's non-essential operations.

Temporary Increases Or Decreases Are Disregarded

Revenue streams that are tangential to a company's core activity are not included in the calculation of S&P Core Earnings. Examples include one-time profits from asset sales, pension asset gains, unrealized gains from hedging actions, and insurance or litigation payouts.

Effect on S&P's Basic Earnings

The S&P Core Earnings metric is designed to capture earnings from regular company activities. Because it does not include the impact of fluctuations in the capital markets on profits, operating profit is widely accepted as a measure of a company's actual earnings performance.

The S&P Core Earnings have been well-received as an additional measure of a company's success since its inception. Management Accounting Quarterly, a scholarly publication in the field, has argued that stock analysts and investors would benefit from having access to S&P Core Results alongside GAAP earnings.

An even more direct argument may be made for this. "Many corporations are prone to utilize financial levers, such as gains from their pension funds, to enhance their earnings," writes Dimitris N. Chorafas in his book Creative Accounting, EBITDA, and Core Earnings. The S&P Core Earnings methodology aims to prevent such strategies from being effective.

Facts and Figures for a Few S&P 500 Groups

As of the conclusion of the third quarter of 2021, Core Earnings had increased year over year for all eleven S&P 500 industry groups. Core Earnings for the Energy industry climbed the most year over year, from $-1.1 billion in 2020 to $84.3 billion in 2021.

The growth rate of Core Earnings in the Technology sector in 2021 was 42% compared to the previous year. The Consumer Non-cyclical sector had the slowest YoY growth in 2021, and the Real Estate sector had the lowest Core Earnings.

Industry Analysis Example: The Technology Sector

Figure 4 displays that in 2021, Core Earnings for the Technology sector increased by 42% YoY to $466.9 billion, while GAAP Earnings increased by 46% to $503.0 billion. There is a significant income gap across different segments of the IT industry. Seventy-nine businesses in the Technology sector in 2021, yet only five will generate more than 60% of the sector's Core Earnings.

A Real-World Illustration

Earnings per share are one of the most critical metrics for stock traders. Potential shareholders of The Procter & Gamble Company may have been shocked to see that the company earned just $0.93 per share in the second quarter of its 2018 fiscal year.

Earnings per share were $1.19 but "excludes non-core restructuring costs and U.S. Tax Act transitional consequences," thus the actual figure is likely higher. The second required recalculating a net deferred liability position due to a tax bill for overseas income being brought home.

There wouldn't be more of this; it was an isolated incident. Procter & Gamble included forward guidance of EPS for both in the same news release to continue the separation of core and GAAP earnings. This split in the EPS forecast clarifies the company's critical operations.

Summary

When attempting to appraise the market in the present, investors should exercise caution when looking at past multiples. The conclusion regarding the profits and the investments changes when the piles are sorted more precisely, but the overall cash flow remains the same.

This is crucial because the move from physical to intangible investment may be underestimated if the standard practice of using multiples previously used is continued.

Read more