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Earnings Distortion Scorecard: Week of 1/13/20 – 1/17/20

New Constructs

New Constructs
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Investment Analyst

For the week of 1/13/20-1/17/20, we focus on the Earnings Distortion scores for 31 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.

Our Earnings Distortion Scores[1] 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 we expect to beat or miss earnings expectations the week of January 13, 2020.

Figure 1: Earnings Distortion Scorecard Highlights: Week of 1/13/20-1/17/20

Sources: New Constructs, LLC and company filings

The appendix to this report shows all the S&P 500 companies, plus those with market caps greater than $10 billion, that report earnings the week of January 13, 2020.

Details: CSX’s Earnings Distortion

Over the trailing twelve months (TTM) period, CSX had $221 million in net earnings distortion that cause earnings to be overstated. Notable unusual income buried in the fine print of the firm’s 2018 10-K include:

  • $154 million in gain on property dispositions – Page 57
  • $74 million in other income – Page 94

The gain on property dispositions comes from CSX selling off some of its real estate assets and rail lines. CSX’s other income is primarily from non-operating pension plan gains.

In total, we identified $0.27/share (6% of reported EPS) in net unusual expenses in CSX’s TTM results. After removing this earnings distortion from GAAP net income, we see that CSX’s TTM core earnings of $3.92/share are significantly below its GAAP EPS of $4.19.

The analyst consensus for CSX’s Q4 2019 earnings is $1.02/share, which comes out to $4.08/share on an annualized basis. Investors who only look at GAAP net income will think that analysts are projecting CSX’s earnings to decline. By removing earnings distortion, we show that consensus estimates imply significant growth. As a result, we expect CSX to miss earnings estimates.

Figure 1 shows that CSX is one of four companies we expect to miss earnings expectations for the week of 1/13. Two companies get our “Beat” rating, and two more are “Strong Beat”, which means we are especially confident that those stocks will beat expectations.

Appendix: All Major Companies That Report January 13-17

Figure 2 shows all the S&P 500 companies, plus those with market caps greater than $10 billion, that report earnings the week of January 13, 2020.

Figure 2: Earnings Distortion Scorecard: Week of 1/13/20-1/17/20

Sources: New Constructs, LLC and company filings

[1] Note that Earnings Distortion scores will be added to our website via a new column on the Screeners and Portfolios page in January 2020.

Click here to download a PDF of this report.

This article originally published on January 6, 2020.

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Disclosure: New Constructs

Disclosure: David Trainer, Kyle Guske II, Sam McBride, Andrew Gallagher, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

About New Constructs

Our stock rating methodology instantly informs you of the quality of the business and the fairness of the stock’s valuation. We do the diligence on earnings quality and valuation so you don’t have to.

In-depth risk/reward analysis underpins our stock rating. Our stock rating methodology grades every stock according to what we believe are the 5 most important criteria for assessing the quality of a stock. Each grade reflects the balance of potential risk and reward of buying that stock. Our analysis results in the 5 ratings described below. Very Attractive and Attractive correspond to a “Buy” rating, Very Unattractive and Unattractive correspond to a “Sell” rating, while Neutral corresponds to a “Hold” rating.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from New Constructs and is being posted with permission from New Constructs. The views expressed in this material are solely those of the author and/or New Constructs and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

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