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.

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As of today, all of the companies in the Dow Jones Industrial Average (DJIA) have reported actual EPS for Q3 2017. 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?

GAAP vs. Non-GAAP EPS

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.

GAAP vs. Non-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.

GAAP vs. Non-GAAP EPS

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). Excluding Merck, the average difference between non-GAAP EPS and GAAP EPS for the remaining 20 DJIA companies was 15.8%. 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%.

DJIA: Top Five Non-GAAP EPS > GAAP EPS* for Q3 2017

COMPANY TICKER NON-GAAP EPS GAAP EPS DIFFERENCE (%)
 Merck & Co., Inc. MRK 1.11 -0.02 5650.0%
 Wal-Mart Stores, Inc. WMT 1.00 0.58 72.4%
 DowDuPont Inc. DWDP 0.55 0.33 66.7%
 Coca-Cola Company KO 0.50 0.33 51.5%
 Pfizer Inc. PFE 0.67 0.47 42.6%

  *Non-GAAP EPS and GAAP EPS from continuing operations were used when provided

Thus, the average difference between non-GAAP and GAAP EPS for Q3 2017 was above the average of the past six quarters due to Merck. Excluding Merck, the average difference between non-GAAP EPS and GAAP EPS for the third quarter was below the average of the past six quarters. The median difference between non-GAAP and GAAP EPS in Q3 2017 was also below the median of the past six quarters.

Article by John Butters, FactSet

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