Earnings Frustration!

[Kerim]

I like to keep close tabs on my stocks, and so I keep a speadsheet that includes quarterly earnings. Over the weekend, I was trying to update the spreadsheet, and was reminded just what an infuriating exercise it can be. I like to get my information from the company’s reports itself, but then usually find: adjusted, non-adjusted, GAAP, non-GAAP, from continuing operations, “one time” charges, with and without currency exchanges, etc., etc., etc. Not to mention restatements that revise a quarter’s numbers long after initially reported, such that the quarterly report does not match the annual report. Then I look at various financial websites, and their earnings info does not match ANY of the variants I found in looking at the company’s materials.

It is such an important number, but so hard to nail down. I know, I know, take a deep breath. “Earnings” are ultimately somewhat subjective, and need to be taken with a grain of salt.

What do you guys consider reliable sources for consistent earnings information? How do you think about / handle the amorphous aspects of earnings?

By the way, in my book the worst offender is PFE.

[TomK]

It is one of the many reasons that I prefer dividend growth stocks in the first place. As many have observed, companies can tinker endlessly with earnings, but dividends can't be faked -- it is cold hard cash in my account. A dividend that grows steadily over the years indicates good health and -- I hope -- also indicates that earnings are indeed growing.

Of course it is a bit of a chicken and egg problem, and it would be immensely reassuring if earnings were completely clear and transparent, because a past dividend raise can come by increasing the payout ratio instead of growing earnings.

All of these are reasons that I prefer simple businesses, with a bias to consumer staples, that have raised the dividend for many years.

[hendi_alex]

I think that paying too much attention is counter productive anyway. Quarterly variations tend to make a person far to short term oriented. I've heard complaints from CEOs on Bloomberg or elsewhere, that the pressure to keep up quarterly numbers is often a distraction from the longer term goal of the company.

Also there is the apple to oranges aspect, of business like MLPs and REITs which use FFO or DCF or other metric to better reflect overall profits and dividend coverage. Comparing these to other companies, using GAAP would needlessly create a false cause for concern.

Perhaps do as you are doing, but mostly pay attention to the tone of the CC/quarterly releases, and then dig into the annual reports once per year to compare YOY performance. But even YOY only has relevance in the context of the business cycle or in comparison to performance of competitors.

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"As many have observed, companies can tinker endlessly with earnings, but dividends can't be faked -"

For fairly prolonged periods dividends can be covered by share offerings or by issuance of debt. What you say is probably true of the well known big cap dividend Aristocrat types of stocks that most investors here hold. But when one enters the murky waters of MLPs, REITs, MREITs, BDCs, telecoms, etc. determining dividend coverage, to me, becomes one of the most important metrics. Dividend coverage can not be calculated without finding some real measure of the cash that is left over after all of the bills have been paid.

[EricL]

Counter-intuitive as it seems, keep in mind that it's actually in the shareholders best interest for the company to report as low of earnings as possible every quarter. The higher the earnings, the more taxes the company has to pay.

If the company is able to generate large cash flows and pay a dividend at an increasing rate I am happy. Don't get me wrong, I'm not saying ignore earnings, they are the mother's milk for an increasing share price, but don't get hung up too much on variances from quarter to quarter. Sometimes those accounting techniques are nothing more than avoidance of the tax man.

[cannew]

I agree with TomK that keeping it simple eliminates many of the frustrations one encounters. After years of trying to perform all types of calculations and analysis strategies I found that I was really trying to forecast the future based on the available numbers. The results were rarely correct or effective and basically a waste of time and effort.

The work was coming up with a list of DG companies I wanted to buy and monitor. After the list was compiled I ignore all others and just watch the ones on the list.

Since I've gone with DG and concentrate on Income, the analysis I need to do minimal and quite easy.

[Kerim]

Dusting off a super old thread to say: It's about time! SEC to scrutinize use of non-GAAP measures by public companies.

[DividendGarden]

(10-14-2013, 07:10 PM)Kerim Wrote: It is such an important number, but so hard to nail down. I know, I know, take a deep breath. “Earnings” are ultimately somewhat subjective, and need to be taken with a grain of salt.

What do you guys consider reliable sources for consistent earnings information? How do you think about / handle the amorphous aspects of earnings?

I completely agree.  What I ended up doing for the sake of time is just deciding on a site or two that I trust and only using the EPS number that they report.  Primarily, I use the EPS that David Fish's CCC list reports and just know that it's from Finviz.com and is just gaap EPS.  Knowing the limitations of gaap, I am okay with this.

[Kerim]

(03-21-2016, 09:30 AM)DividendGarden Wrote: I completely agree.  What I ended up doing for the sake of time is just deciding on a site or two that I trust and only using the EPS number that they report.  Primarily, I use the EPS that David Fish's CCC list reports and just know that it's from Finviz.com and is just gaap EPS.  Knowing the limitations of gaap, I am okay with this.

I more or less stick with GAAP, but make mental note of things that I think truly are "one-off."

Here is another interesting blurb, with an interesting graph about the "GAAP gap." I think this is needlessly alarmist, suggesting that we've returned to 2008 crisis levels of divergence between GAAP and "adjusted" earnings. I don't think the graph even shows that. But interesting nonetheless.

[Dividend Watcher]

I usually use GAAP numbers when looking at a company. Even use it with T as I know there's a big depreciation/amortization component built in there. If I get a little nervous, I take a quick calculation of free cash flow and I feel better.

If you think about it, the whole purpose of GAAP is to provide a uniform way of reporting earnings and to account for everything that's involved in running a business. Sure, depreciation, amortization & impairments are non-cash expenses. We talked a lot about it over in this thread but even Buffet has warned that you can't just ignore them when valuing a company. It's capital that's already been spent by the business so it's not there to invest in anything else.

The only time I intentionally adjusted for some income/expense was when CMP received a large insurance settlement in 2012 or 2013 for an event (tornado) that was two years old and unlikely to happen again. The amount was too big to ignore in relation to their overall revenue and I excluded it to see how the business was doing.

Currency issues? I get a kick out their adjusting for them. 9 times out of 10, it's stuck in a "bank" outside of the country so it's not available for them to do things like pay me dividends anyway. Hopefully they use it to support their foreign operations so no "home" currency is needed.

[DividendGarden]

(03-21-2016, 04:45 PM)Dividend Watcher Wrote: I usually use GAAP numbers when looking at a company. Even use it with T as I know there's a big depreciation/amortization component built in there. If I get a little nervous, I take a quick calculation of free cash flow and I feel better.

Great point.  FCF is much more important for dividends than gaap EPS.