For the week of 5/25/20-5/29/20, we focus on the Earnings Distortion Scores for 22 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:

  1. more accurate than “Income Before Special Items” from Compustat, owned by S&P Global (SPGI) and
  2. remove significant bias from IBES Street Earnings from Refinitiv, owned by owned by Blackstone (BX) and Thomson Reuters (TRI).

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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. 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”, “Beat”, “Miss”, or “Strong Miss” Earnings Distortion Score and are expected to report the week of May 25, 2020.

Figure 1: Earnings Distortion Scorecard Highlights: Week of 5/25/20-5/29/20

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 25, 2020.

Details: Anaplan Inc. (PLAN): Strong Beat Earnings Distortion Score

In fiscal 2020, Anaplan Inc. had -$49 million in net earnings distortion that cause earnings to be understated. Notable unusual expenses hidden and reported in PLAN’s 2020 10-K include:

  • $11 million charge related to reduction of operating lease right-of-use assets and accretion of operating lease liabilities – Page 75
  • $1 million in acquisition-related costs – Page 88
  • $1 million loss on disposal of property and equipment – Page 75
  • $1 million in other expenses reported on the income statement

In addition, we made a $35 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 -$0.37/share (33% of GAAP EPS) in net unusual expenses in PLAN’s 2020 GAAP results. After removing this earnings distortion, PLAN’s 2020 core earnings of -$0.78/share are less of a loss than GAAP EPS of -$1.15, per Figure 2.

With understated earnings, PLAN gets our “Strong Beat” Earnings Distortion Score and is likely to beat consensus expectations. While we expect PLAN to beat expectations in the short term, its negative return on invested capital (ROIC) and expensive valuation earn it an Unattractive Risk/Reward rating, which focuses on the long term.

Figure 2: PLAN Core Earnings Vs. GAAP: Fiscal 2018 – Fiscal 2020

Sources: New Constructs, LLC and company filings

Figure 1 shows that PLAN is one of just two 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 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 18, 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 May 25 – May 29

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 25, 2020.

Figure 3: Earnings Distortion Scorecard: Week of 5/25/20-5/29/20

Sources: New Constructs, LLC and company filings

[1] Earnings Distortion scores on ~3,0000 stocks are also available to clients of our website.

Click here to download a PDF of this report.

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