For the week of 11/16/20-11/20/20, we focus on the Earnings Distortion Scores for 20 companies.
Our Earnings Distortion Scores[1] empower investors to make smarter investments with superior data as well as defend against management efforts to obfuscate financial performance.
Our proprietary measure of earnings distortion (as featured on CNBC Squawk Box) leverages proprietary data featured in Core Earnings: New Data & Evidence. This paper shows that our adjusted core earnings are more accurate than “Operating Income After Depreciation” and “Income Before Special Items” from S&P Global (SPGI).
Weekly Earnings Distortion Insights
Figure 1 contains the 15 largest (by market cap) companies that earn a “Strong Beat”, “Beat”, “Miss” or “Strong Miss” Earnings Distortion Score and are expected to report the week of November 16, 2020.
Figure 1: Earnings Distortion Scorecard Highlights: Week of 11/16/20-11/20/20
Sources: New Constructs, LLC and company filings
The appendix shows the Earnings Distortion Scores for all the S&P 500 companies, plus those with market caps greater than $10 billion, that are expected to report the week of November 16, 2020.
Details: Aramark (ARMK): Earnings Distortion Score: Beat
Over the trailing-twelve months (TTM), Aramark has -$394 million in net earnings distortion that cause earnings to be understated by -$1.56/share or 173% of EPS. Notable unusual expenses hidden and reported in Aramark’s filings include:
- $199 million goodwill impairment reported on the income statement – 2Q20 10-Q
- $125 million in severance charges related to headcount reductions – Page 11 of the footnotes – 3Q20 10-Q
- $36 million in merger and integration costs – Page S-19 of the footnotes – 2019 10-K
- $28 million in charges related to certain legal settlements – Page 29 in the MD&A – 2019 10-K
- $19 million in net severance charges – Page S-19 of the footnotes – 2019 10-K
In addition, we made a $151 million adjustment for income tax distortion. This adjustment normalizes reported income taxes by removing the impact of unusual items.
In total, we identified -$1.56/share (173% of GAAP EPS) in net unusual expense that cause Aramark’s TTM GAAP results to be understated. After removing this earnings distortion, Aramark’s TTM core earnings of $0.66/share are much greater than GAAP EPS of -$0.90, per Figure 2.
With understated earnings, ARMK gets our “Beat” Earnings Distortion Score and is likely to beat consensus expectations. While we expect ARMK to beat expectations in the short term, its bottom-quintile return on invested capital (ROIC) and expensive valuation earn it an Unattractive Risk/Reward rating, which is our long term rating on the stock.
Figure 2: Aramark’s Core Earnings Vs. GAAP: 2016 - TTM
Sources: New Constructs, LLC and company filings
Figure 1 shows that Aramark is one of eight companies that earn our “Strong Beat” or “Beat” score for this week.
How to Make Money with Earnings Distortion Data
“Trading strategies that exploit {adjustments provided by New Constructs} produce abnormal returns of 8% per year.” – Page 1 in Core Earnings: New Data & Evidence
In Section 5.2, professors from HBS & MIT Sloan present a long/short strategy that holds the stocks with the most understated EPS and shorts the stocks with the most overstated earnings.
This strategy produced abnormal returns of 8% a year. Click here for more details on our data offerings.
We Provide 100% Audit-ability & Transparency
Clients can audit all of the unusual items used in our calculations in the Marked-Up Filings section of each of our Company Valuation models. We are 100% transparent about what goes into our research because we want investors to trust our work and see how much goes into building the best earnings quality and valuation models.
This article originally published on November 9, 2020.
Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, sector, style, or theme.
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Appendix: All Major Companies Expected to Report November 16 – 20
Figure 3 shows all the S&P 500 companies, plus those with market caps greater than $10 billion, that are expected to report the week of November 16, 2020.
Figure 3: Earnings Distortion Scorecard: Week of 11/16/20-11/20/20
Sources: New Constructs, LLC and company filings
[1] Earnings Distortion scores on ~3,000 stocks are also available to clients of our website.