Summary
- For the week of 1/6/20-1/10/20, we focus on the Earnings Distortion scores for three companies.
- As corporate managers bury key data in footnotes to manipulate earnings, and investors miss them, investment opportunities arise.
- Our Earnings Distortion Scores empower investors to combat management efforts to obfuscate financial performance.
- Looking for more stock ideas like this one? Get them exclusively at Value Investing 2.0 . Get started today »
For the week of 1/6/20-1/10/20, we focus on the Earnings Distortion scores for three companies.
We measure earnings distortion using a proprietary human-assisted ML methodology featured in a recent paper from Harvard Business School (HBS) and MIT Sloan. This paper empirically shows that street earnings estimates are incomplete and less accurate since they do not consistently and accurately adjust for unusual gains/losses buried in footnotes.
As corporate managers bury key data in footnotes to manipulate earnings, and investors miss them, investment opportunities arise because stock prices tend to be driven by core earnings power.
Our Earnings Distortion Scores empower investors to combat management efforts to obfuscate financial performance. The aggregate level of distortion recently reached levels not seen since right before the tech bubble and the financial crisis.
Weekly Earnings Distortion Insights
Figure 1 contains the S&P 500 companies, plus those with market caps greater than $10 billion, that report earnings the week of Jan. 6, 2020.
Figure 1: Earnings Distortion Scorecard: Week of 1/6/20-1/10/20
Sources: New Constructs, LLC and company filings
Details: WBA’s Earnings Distortion
In fiscal 2019, Walgreens Boots Alliance (NASDAQ:WBA) had $601 million in net earnings distortion that cause earnings to be understated. Notable unusual expenses found in the firm’s 2019 10-K include:
- $477 million in transformational cost management expenses primarily recorded in SG&A – Page 47
- $303 million in acquisition-related costs – Page 47
- $196 million in store optimization costs primarily recorded in SG&A – Page 47
- $73 million in impairment charges on its pharmacy licenses primarily recorded in SG&A – Page 80
The transformational cost management expenses are part of WBA’s Transformational Cost Management Program, which aims to deliver more than $1.8 billion in costs savings by fiscal 2022. Similarly, the store optimization costs are part of WBA’s Store Optimization Program, which aims to close around 750 stores in the company’s Retail Pharmacy USA segment.
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