While all publicly traded U.S. companies report EPS on a GAAP (generally accepted accounting principles) basis, many U.S. companies also choose to report EPS on a non-GAAP basis. There are mixed opinions in the market about the use of non-GAAP EPS. Supporters of the practice argue that it provides the market with a more accurate picture of earnings from the day-to-day operations of companies, as items that companies deem to be one-time events or non-operating in nature are typically excluded from the non-GAAP EPS numbers. Critics of the practice argue that there is no industry-standard definition of non-GAAP EPS, and companies can take advantage of the lack of standards to exclude items that (more often than not) have a negative impact on earnings to boost non-GAAP EPS.
Both critics and supporters of the use of non-GAAP EPS numbers were provided with figures to support their arguments during the fourth quarter earnings season for the Dow Jones Industrial Average (DJIA) because of the recently passed tax law.
Critics of the use of non-GAAP EPS can point to the unusually large number of DJIA companies that reported non-GAAP EPS in Q4 and the unusually wide gap between the GAAP EPS numbers and non-GAAP EPS numbers to support their argument against the use of these numbers
For Q4 2017, 28 (or 93%) of the 30 companies in the DJIA reported non-GAAP EPS in addition to GAAP EPS. Since 2016, 68% of companies in the DJIA have reported non-GAAP EPS in addition to GAAP EPS on average. Of these 28 companies, 21 (or 75%) reported non-GAAP EPS that exceeded GAAP EPS. Since 2016, 79% of companies in the DJIA have reported non-GAAP EPS that exceeded GAAP EPS on average. The median difference between non-GAAP EPS and GAAP EPS for all 28 companies was 110.0%. Since 2016, the median difference between non-GAAP EPS and GAAP EPS has been 13.0%.
Thus, more companies in the DJIA reported non-GAAP EPS in Q4 2017 relative to recent years and these non-GAAP EPS numbers were typically much larger than the GAAP EPS numbers.
Supporters of the use of non-GAAP EPS can highlight that EPS growth rates (and declines) for Q4 for DJIA companies using non-GAAP EPS were less volatile due to the exclusion of tax law items (a one-time event) than the EPS growth rates (and declines) using GAAP EPS.
Overall, 28 DJIA companies reported both GAAP EPS and non-GAAP EPS for the fourth quarter. On a GAAP EPS basis, 16 of these companies (or 57%) reported either an EPS growth rate or EPS decline of 100% or more (with two companies reporting an EPS growth rate or EPS decline of 1000% or more) for the fourth quarter. On a non-GAAP basis, just three of these companies (or 11%) reported an EPS growth rate or EPS decline of 100% or more (with none reporting an EPS growth rate or EPS decline of 1000% or more) for the quarter.
Thus, the EPS growth numbers generated from non-GAAP EPS for DJIA companies in Q4 were less volatile and more likely a better reflection of earnings growth from day-to-day operations than the EPS growth numbers generated from GAAP EPS.
The high number of DJIA companies reporting non-GAAP EPS, the large spread between GAAP EPS and non-GAAP EPS, and the high number of companies reporting large EPS growth rates or large EPS declines using GAAP EPS can all be attributed to the unusually large charges and gains reported by these companies due to the tax law. Almost all of the companies in DJIA reported charges or gains in the fourth quarter because of the tax legislation.
Overall, 19 DJIA companies reported a net charge due to the tax law, while nine DJIA companies reported a net gain due to the tax law. These net charges and gains were typically the largest single item accounting for the unusually large differences between GAAP EPS and non-GAAP EPS for these companies for the quarter. Due to the unusually large size of these charges or gains, a number of companies in the DJIA that typically did not provide non-GAAP EPS numbers in the past provided non-GAAP EPS numbers in the fourth quarter (excluding the impact of these charges and gains). Thus, the tax law charges and gains were included in the GAAP EPS numbers reported by these companies and (typically) excluded from the non-GAAP EPS numbers reported by these companies for the fourth quarter.
DJIA Q417 EPS Growth: GAAP EPS* vs. Non-GAAP EPS*
Exxon Mobil Corporation
Verizon Communications Inc.
UnitedHealth Group Incorporated
Walt Disney Company
Visa Inc. Class A
Home Depot, Inc.
Procter & Gamble Company
NIKE, Inc. Class B
JPMorgan Chase & Co.
Travelers Companies, Inc.
Wal-Mart Stores, Inc.
Merck & Co., Inc.
United Technologies Corporation
International Business Machines Corporation
Goldman Sachs Group, Inc.
American Express Company
Johnson & Johnson
General Electric Company+
Cisco Systems, Inc.
* Non-GAAP EPS and GAAP EPS from continuing operations were used when provided
+ Non-GAAP EPS numbers excluding tax impact were used for BA and GE
^ Pro-forma non-GAAP EPS and GAAP EPS were used for DWDP
John’s weekly research report, Earnings Insight provides analysis and commentary on trends in corporate earnings data for the S&P 500, including revisions to estimates, year-over-year growth, performance relative to expectations, and valuations. He is a widely used source for the media and has appeared on CNBC, Fox Business News, and the Business News Network. In addition, he has been cited by numerous print and online publications such as The Wall Street Journal, Financial Times, The New York Times, MarketWatch, and Yahoo! Finance.