Over the years, I have frequently emphasized that stocks are not a claim on "forward operating earnings." They are not even a claim on reported net earnings (and should not be valued as a blind multiple to a single year's results in any event). They are a claim on a very long-term stream of future cash flows that will actually be delivered to investors as dividends, or retained on their behalf as an increment to the book value of the company.
The differences between these various measures of corporate performance are striking. If it seems like this point is simply academic, ask Warren Buffett (who refers to those actual, deliverable cash flows as "owner earnings"). Every year, the first page of Berkshire Hathaway's Annual Report contains a table of the company's year-by-year performance. The table does not report the stock price performance of Berkshire Hathaway. Rather, it shows the annual growth in the company's book value, compared with the total return for the S&P 500. Since
While stocks are often recommended to investors based on analyst estimates of the operating earnings expected over the coming year, it is important to recognize that these estimates are invariably lowered over the course of the year - even up to the day before actual earnings reports are released. So an "earnings surprise" is typically defined as the difference between reported operating earnings and the consensus estimate immediately preceding that report. Moreover, operating earnings omit a multitude of charges, including so-called "extraordinary" and "non-recurring" losses, even when these charges are clearly ordinary and recurring aspects of the business. Reported net earnings do reflect those losses, however, it turns out that even net earnings are optimistic.