September 3, 2014

Could Financial Engineering be cause of Q2 earnings beat

Most of the second-quarter earnings reports are now in, and it appears that S&P earnings rose by about 9.4% (year over year). This gain is about 300 basis points above consensus expectations.

In terms of quality, there was less than meets the eye, with buybacks, lower interest expenses and lower effective tax rates contributing to more than 2% of the 9.4% growth. Productivity gains contributed to a surprising margin expansion of about 3% of the 9.4% earnings per share gain.

Though 2014 results seem destined to beat my expectations, a lot of the gains were through financial engineering (which seemingly should be accorded a lower price earnings multiple vis-a-vis organic growth). 

Originally published at