For the week of 8/10/20-8/14/20, we focus on the Earnings Distortion Scores for 20 companies.

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.

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 “Operating Income After Depreciation” and “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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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 August 10, 2020.

Figure 1: Earnings Distortion Scorecard Highlights: Week of 8/10/20-8/14/20

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 August 10, 2020.

Details: ICU Medical (ICUI): Earnings Distortion Score: Beat

Over the trailing-twelve months (TTM), ICU Medical has -$44 million in net earnings distortion that cause earnings to be understated by $2.03/share. Notable unusual expenses hidden and reported in ICU Medical’s filings include:

  • $81 million in restructuring, strategic transaction and integration expenses reported on the income statement – 2019 10-K
  • $16 million in one-time supply chain inventory optimization charges – Page 26 2019 10-K
  • $12 million in restructuring, strategic transaction and integration expenses reported on the income statement – 1Q20 10-Q

These unusual expenses were partially offset by a $47 million gain on the change in fair value of contingent earn out reported on the firm’s 2019 income statement.

In total, we identified $2.03/share (50% of GAAP EPS) in net unusual expense that cause ICU Medical’s TTM GAAP results to be understated. After removing this earnings distortion, ICU Medical’s TTM core earnings of $6.06/share are much greater than GAAP EPS of $4.03, per Figure 2.

With understated earnings, ICU Medical gets our “Beat” Earnings Distortion Score and is likely to beat consensus expectations.

Figure 2: ICU Medical Core Earnings Vs. GAAP: 2016 - TTM

Sources: New Constructs, LLC and company filings

Figure 1 shows that ICU Medical is one of nine companies that earn our “Beat” or “Strong 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 8% per year.” – Page 1 in Core Earnings: New Data & Evidence

In Section 5.2, 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 8% 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 August 3, 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 August 10 – August 14

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 August 10, 2020.

Figure 3: Earnings Distortion Scorecard: Week of 8/10/20-8/14/20

Sources: New Constructs, LLC and company filings

[1] Earnings Distortion scores on ~3,000 stocks are also available to clients of our website.

Click here to download a PDF of this report.

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