For the week of 6/8/20-6/12/20, we focus on the Earnings Distortion Scores for 6 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 five companies that earn a “Strong Beat”, “Beat”, “Miss”, or “Strong Miss” Earnings Distortion Score and are expected to report the week of June 8, 2020.
Figure 1: Earnings Distortion Scorecard Highlights: Week of 6/8/20-6/12/20
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 June 8, 2020.
Details: Lululemon Athletica (LULU): Earnings Distortion Score: Miss
In 2019, Lululemon Athletica had $12 million in net earnings distortion that cause earnings to be overstated by $0.09/share. Notable unusual income hidden and reported in LULU’s fiscal 2019 10-K includes:
- $8 million in other income reported on the income statement – fiscal 2019 10-K
- $3 million in foreign exchange gains – fiscal 2019 10-K page 57
In addition, we made a $1 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 $0.09/share (2% of GAAP EPS) in net unusual income in LULU’s 2019 GAAP results. After removing this earnings distortion, LULU’s fiscal 2019 core earnings of $4.84/share are less than GAAP EPS of $4.93, per Figure 2.
With overstated earnings, LULU gets our “Miss” Earnings Distortion Score and is likely to miss consensus expectations.
Figure 2: LULU Core Earnings Vs. GAAP: Fiscal 2015 – Fiscal 2019
Sources: New Constructs, LLC and company filings
Figure 1 shows that LULU is one of two companies that earn our “Strong Miss” or “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 June 1, 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 June 8 – June 12
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 June 8, 2020.
Figure 3: Earnings Distortion Scorecard: Week of 6/8/20-6/12/20
Sources: New Constructs, LLC and company filings
[1] Earnings Distortion scores on ~3,0000 stocks are also available to clients of our website.