2010 earnings for the retail apparel sector have been quite strong, especially compared to 2009. However, looking behind the window dressing of reported earnings, we find that not all earnings are made the same. Zumiez Inc. (ZUMZ), retailer of cool, new action apparel turned to an old accounting trick to boost its 2010 earnings by 13%
What I bet very few people, outside the company itself, know is that EK’s pension liabilities could torpedo the company into bankruptcy and send the stock to significantly lower levels. In the company’s recently published 10K, we found that EK’s pension obligations are underfunded by $2.6 billion, about 3 times the company’s market value.
Recent weakness in Intel (INTC)’s stock presents an excellent buying opportunity for investors. As one of March’s most attractive, INTC offers the rare combination of strong cash flow growth with a remarkably cheap valuation.
Caterpillar Inc. (CAT) gets our Dangerous Rating. This means CAT’s quality-of-earnings are not attractive and the stock’s valuation it very expensive.
Principal Financial Group, Inc. (PFG) reported accounting earnings in 2010 that are misleading compared to the true economic earnings of the business. PFG’s 2010 reported earnings are artificially boosted by a reduced loan loss expense, which is funded by a draw down of the company’s loss reserves.
Most investors are not aware that companies hide one-time and unusual charges and income inside normal, operating line items (e.g. “Cost of sales”) on their income statement. These hidden items can mislead investors by artificially decreasing/increasing GAAP earnings. We found 13,000+ one-time items buried in normal line items like “Cost of Sales” by studying the Footnotes of 10-K filings from 1998 thru 2/15/2011. This research revealed that companies have concealed over $41 billion in one-time items.
Don’t be fooled by the histrionics and high-flying stunts. World Wrestling Entertainment is an excellent business. With a return on invested capital over 22%, it is one of the most profitable companies in the United States. Excess cash is $207mm, more than 20% of the company’s market value.