For the week of 11/9/20-11/13/20, we focus on the Earnings Distortion Scores for 24 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 9, 2020.
Figure 1: Earnings Distortion Scorecard Highlights: Week of 11/9/20-11/13/20
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 9, 2020.
Details: The Walt Disney Company (DIS): Earnings Distortion Score: Beat
Over the trailing-twelve months (TTM), The Walt Disney Company has -$5.3 billion in net earnings distortion that cause earnings to be understated by -$2.93/share or 484% of EPS. Notable unusual expenses hidden and reported in The Walt Disney Company’s filings include:
- $5.0 billion impairment charges for goodwill and intangible assets in the International Channels business – Page 43 3Q20 10-Q
- $1.2 billion in restructuring and impairment charges reported on the income statement – 2019 10-K
- $552 million fair value step-up on film and television costs – Page 84 2019 10-K
- $538 million impairment of equity investments – Page 35 2019 10-K
- $511 million charge for the extinguishment of a portion of the debt originally assumed in the Twenty First Century Fox acquisition – Page 31 2019 10-K
- $200 million acquisition-related expenses – Page 97 2019 10-K
- $94 million restructuring charges – Page 43 3Q20 10-Q
These expenses are partially offset by a $4.8 billion gain on Hulu reported in the firm’s 2019 10-K. In addition, we made a $271 million adjustment for income tax distortion. This adjustment normalizes reported income taxes by removing the impact of unusual items.
In total, we identified -$2.93/share (484% of GAAP EPS) in net unusual expense that cause The Walt Disney Company’s TTM GAAP results to be understated. After removing this earnings distortion, The Walt Disney Company’s TTM core earnings of $2.33/share are much greater than GAAP EPS of -$0.61, per Figure 2.
With understated earnings, DIS gets our “Beat” Earnings Distortion Score and is likely to beat consensus expectations.
Figure 2: The Walt Disney Company’s Core Earnings Vs. GAAP: 2016 - TTM
Sources: New Constructs, LLC and company filings
Figure 1 shows that The Walt Disney Company 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 2, 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 9 – 13
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 9, 2020.
Figure 3: Earnings Distortion Scorecard: Week of 11/9/20-11/13/20
Sources: New Constructs, LLC and company filings
[1] Earnings Distortion scores on ~3,000 stocks are also available to clients of our website.