For the week of 5/18/20-5/22/20, we focus on the Earnings Distortion Scores for 27 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 shows that our adjusted core earnings are:
- more accurate than“Income Before Special Items” from Compustat, owned by S&P Global (SPGI) and
- remove significant bias from IBES Street Earnings from Refinitiv, owned by owned by Blackstone (BX) and Thomson Reuters (TRI).
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 “Beat”, “Miss”, or “Strong Miss” Earnings Distortion Score and are expected to report the week of May 18, 2020.
Figure 1: Earnings Distortion Scorecard Highlights: Week of 5/18/20-5/22/20
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 May 18, 2020.
Details: NVIDIA Corporation (NVDA): Beat Earnings Distortion Score
In fiscal 2020, NVIDIA had -$220 million in net earnings distortion that cause earnings to be understated. Notable unusual expenses hidden in NVDA’s 2020 10-K include:
- $161 million in inventory provisions – Page 29
- $30 million in acquisition-related and other costs – Page 67
- $15 million in legal settlement costs – Page 67
In addition, we made a $12 million 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 -$0.36/share (8% of GAAP EPS) in net unusual expenses in NVDA’s 2020 GAAP results. After removing this earnings distortion, NVDA’s 2020 core earnings of $4.88/share are greater than GAAP EPS of $4.52, per Figure 2.
With understated earnings, NVDA gets our “Beat” Earnings Distortion Score and is likely to beat consensus expectations. While we expect NVDA to beat expectations in the short term, its expensive valuation earns it an Unattractive Risk/Reward rating, which focuses on the long term.
Figure 2: NVDA Core Earnings Vs. GAAP: Fiscal 2016 – Fiscal 2020
Sources: New Constructs, LLC and company filings
Figure 1 shows that NVDA is one of just three companies that earn our “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 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 May 11, 2020.
Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, sector, style, or theme.
Follow us on Twitter, Facebook, LinkedIn, and StockTwits for real-time alerts on all our research.
Appendix: All Major Companies Expected to Report May 18 – May 22
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 May 18, 2020.
Figure 3: Earnings Distortion Scorecard: Week of 5/18/20-5/22/20
Sources: New Constructs, LLC and company filings
[1] Earnings Distortion scores on ~3,0000 stocks are also available to clients of our website.