For the week of 4/27/20-5/1/20, we focus on the Earnings Distortion Scores for 173 companies.
Our proprietary measure of earnings distortion (as featured on CNBC Squawk Box) leverages proprietary data featured in Core Earnings: New Data & Evidence. This paper empirically concludes that our adjusted core earnings are superior to:
- “Street Earnings” from Refinitiv’s IBES, owned by Blackstone (BX) and Thomson Reuters (TRI), and
- “Income Before Special Items” from Compustat, owned by S&P Global (SPGI)
COVID-19 is not disrupting our data collection and research. Our Robo-Analyst is more effective than ever.
The paper also shows that investors with better earnings research have a clear advantage in predicting:
- Future earnings (Section 3.4)
- 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. Earnings distortion for the overall market 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 April 27, 2020.
Figure 1: Earnings Distortion Scorecard Highlights: Week of 4/27/20-5/1/20
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 April 27, 2020.
Details: Gilead Sciences, Inc. (GILD) Earnings Distortion
We first featured Gilead Sciences as a Long Idea in January 2015. In 2019, Gilead had $1.8 billion in net earnings distortion that cause earnings to be overstated. Notable unusual income in GILD’s 2019 10-K includes:
- $1.9 billion in Other income reported on the income statement
This unusual income was partially offset by notable unusual expenses hidden in GILD’s 2019 10-K:
- $800 million impairment charge related to IPR&D intangible assets acquired in connection with GILD’s acquisition of Kite Pharma, Inc. – Page 36
- $649 million in inventory write-downs – Page 66
In addition, we made a $1.3 billion adjustment for income tax distortion. This adjustment normalizes reported income taxes and removes the impact of unusual or less persistent items on the taxes applied to core earnings.
In total, we identified $1.38/share (33% of GAAP EPS) in net unusual income in GILD’s 2019 GAAP results. After removing this earnings distortion, GILD’s 2019 core earnings of $2.83/share are lower than GAAP EPS of $4.22, per Figure 2.
With overstated earnings, GILD gets our “Strong Miss” Earnings Distortion Score and is likely to miss consensus expectations.
Figure 2: GILD Core Earnings Vs. GAAP: 2015 – 2019
Sources: New Constructs, LLC and company filings
Figure 1 shows that GILD is one of 12 companies that earn our “Strong Miss” 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 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 April 20, 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 April 27 – May 1
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 April 27, 2020.
Figure 3: Earnings Distortion Scorecard: Week of 4/27/20-5/1/20
Sources: New Constructs, LLC and company filings
Figure 3: Earnings Distortion Scorecard: Week of 4/27/20-5/1/20 (continued)
Sources: New Constructs, LLC and company filings
Figure 3: Earnings Distortion Scorecard: Week of 4/27/20-5/1/20 (continued)
Sources: New Constructs, LLC and company filings
Figure 3: Earnings Distortion Scorecard: Week of 4/27/20-5/1/20 (continued)
Sources: New Constructs, LLC and company filings
Figure 3: Earnings Distortion Scorecard: Week of 4/27/20-5/1/20 (continued)
Sources: New Constructs, LLC and company filings
[1] Earnings Distortion scores on ~3,0000 stocks are also available to clients of our website.