For the week of 2/17/20-2/21/20, we focus on the Earnings Distortion Scores for 67 companies.

Our proprietary measure of earnings distortion leverages cutting-edge ML technology featured in Core Earnings: New Data & Evidence. This paper empirically concludes that our adjusted core earnings is superior to:

  1. “Street Earnings” from Refinitiv’s IBES, owned by Blackstone (BX) and Thomson Reuters (TRI), and
  2. “Income Before Special Items” from Compustat, owned by S&P Global (SPGI)

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The paper also shows that investors with better earnings research have a clear advantage in predicting:

  1. Future earnings (Section 3.4)
  2. Future stock prices (Section 4.3)

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. The aggregate level of earnings distortion recently reached levels not seen since right before the tech bubble and the financial crisis.

Weekly Earnings Distortion Insights

Figure 1 contains the 15 largest (by market cap) companies that earn a “Strong Beat” or “Strong Miss” Earnings Distortion Score and are expected to report the week of February 17, 2020. These stocks are most likely to beat/miss expectations.

Figure 1: Earnings Distortion Scorecard Highlights: Week of 2/17/20-2/21/20

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 February 17, 2020.

Details: MDRX’s Earnings Distortion

Over the trailing twelve months (TTM), Allscripts Healthcare Solutions Inc. (MDRX: $9/share) had $193 million in net earnings distortion that cause earnings to be overstated. Notable unusual income found in MDRX’s filings include:

  • $395 million in income from discontinued operations – Page 59 2018 10-K
  • $172 million in gains from the sale of businesses – Page 59 2018 10-K

The income from discontinued operations stem from MDRX’s sale of its class A shares of Netsmart and the gain on sale is a result of MDRX’s divestiture of OneContent.

These unusual income items were partially offset by $144 million in other losses reported in MDRX’s 2Q19 10-Q. This unusual expense was part of a settlement with the Department of Justice related to a civil and criminal investigation into Practice Fusion.

In total, we identified $1.13/share (91% of reported EPS) in net unusual income in MDRX’s TTM GAAP results. After removing this earnings distortion from GAAP net income, we see that MDRX’s TTM core earnings of $0.11/share are significantly lower than GAAP EPS of $1.24, per Figure 2.

With overstated earnings, and a “Strong Miss” Earnings Distortion Score, MDRX is likely to miss consensus expectations.

Figure 2: MDRX Core Earnings Vs. GAAP: 2015 – TTM

Sources: New Constructs, LLC and company filings

Figure 1 shows that MDRX is one of 11 companies that earn our “Strong Miss” rating for this week. Four companies earn our “Strong Beat” rating for this week.

How to Make Money with Earnings Distortion Data

“Trading strategies that exploit {adjustments provided by New Constructs} produce abnormal returns of 7-to-10% per year.” – Page 1 in Core Earnings: New Data & Evidence

In Section 4.3, 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 7-to-10% 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 February 10, 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 February 17-21

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 February 17, 2020.

Figure 3: Earnings Distortion Scorecard: Week of 2/17/20-2/21/20

Sources: New Constructs, LLC and company filings

Figure 3: Earnings Distortion Scorecard: Week of 2/17/20-2/21/20 (continued)

Sources: New Constructs, LLC and company filings

[1] Note that Earnings Distortion scores are also available to clients of our website.

Click here to download a PDF of this report.