Fact: legacy data providers like S&P Global (SPGI) and Refinitiv miss material unusual gains/losses in footnotes that our superior fundamental data and earnings models catch.
Proof: Core Earnings: New Data & Evidence, forthcoming in The Journal of Financial Economics.
Core Earnings (as featured on CNBC Squawk Box) measure the normalized operating profitability of a business. Accordingly, when calculating core earnings, analysts should strip out any gains/losses that are non-core, non-operating, or unusual.
The Problem
Identifying unusual items that distort reported and consensus earnings has become increasingly difficult. Companies hide this information in the footnotes in ever more complicated ways. It’s gotten so difficult to unravel, that most analysts and data providers don’t do it. As a result, markets inefficiently measure earnings – as proven in The Journal of Financial Economics (JFE).
The Answer
Our Robo-Analyst technology enables us to provide the best database of unusual items in the world and, as a result, provide the best measure of Earnings Distortion – as proven by the paper Core Earnings: New Data and Evidence, forthcoming in The Journal of Financial Economics.
The paper empirically demonstrates that our adjusted Core Earnings are meaningfully superior to the best offerings from Refinitiv’s IBES and S&P Global (SPGI), and “increasingly so over time” to quote the paper.
Figure 1: How to Calculate Core Earnings
Total Revenue
+ Total Operating Income
– Total Reported Operating Expenses, Net
+ Total Hidden Non-Operating Expense, Net
– Reported Interest Expense/(Income), Net
– Reported Losses/(Income) from Unconsolidated Subsidiaries, Net
– Unreported Employee Stock Option (ESO) Expense
– Cash Taxes on Core Earnings
– Reported Minority Interest Expense, Net
– Reported Preferred Dividends, Net
– Reported Dividends on Redeemable Preferred Stock, Net
= Core Earnings
Sources: New Constructs, LLC and company filings
For more details on our calculation of Core Earnings, including the hidden and reported items we collect, we provide case studies here. For details on the difference between the “Reported” and “Hidden” items, click here. Note that data feeds with Earnings Distortion details are typically sold only to Insitutional members.
Earnings Distortion = Net Income Minus Core Earnings
Earnings Distortion is the non-core, non-operating, and unusual gains/losses that must be stripped out when calculating Core Earnings. It equals reported earnings minus Core Earnings. Figure 2 shows the key components of Core Earnings distortion. The higher the Earnings Distortion, the more overstated reported earnings are. The lower the Earnings Distortion, the more understated reported earnings are.
Figure 2: Components of Earnings Distortion
+ Earnings Distortion from 13 Categories of Hidden Items, Net
+ Earnings Distortion from 13 Categories of Reported Items Pre-Tax, Net
+ Income Tax Distortion
+ Earnings Distortion from 2 Categories of Reported Items After-Tax, Net
= Total Core Earnings Distortion, Net
Sources: New Constructs, LLC and company filings
Figure 3 shows the “Hidden” items we display on the Core Earnings pages in our company valuation models on over 5,000 stocks.
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