Big Tech Leads Decline In Core Earnings by David Trainer
Summary
- The earnings recession is worse than it looks on the surface. While GAAP earnings are down 1% over the trailing twelve months, core earnings are down 6%.
- The Technology sector’s earnings distortion worsened more than any other sector over the trailing twelve months and now ranks as second worst.
- Reported earnings have not been this overstated, relative to core earnings, for the Tech sector since the Tech bubble.
- Looking for a helping hand in the market? Members of Value Investing 2.0 get exclusive ideas and guidance to navigate any climate. Get started today »
The earnings recession is worse than it looks on the surface. While GAAP earnings are down 1% over the trailing twelve months, core earnings are down 6%. The difference is Earnings Distortion, which just hit levels not seen since the last two market crashes. We recently showed that there are sectors that are more profitable than they appear. On the flip side, there also are sectors that are less profitable than they appear because earnings distortion is much higher and earnings are more overstated.
The Technology sector’s earnings distortion worsened more than any other sector over the trailing twelve months and now ranks as second worst behind REITs. Reported earnings have not been this overstated, relative to core earnings, for the Tech sector since the Tech bubble. The Technology sector is in the Danger Zone.
Earnings Distortion Rankings by Sector
Figure 1 ranks all 11 sectors by earnings distortion as a percentage of total assets[1] – which professors from HBS and MIT Sloan used in a long/short strategy that generated 10% in abnormal returns. Four of the 11 sectors have positive earnings distortion, i.e. overstated earnings, as do the top three sectors in terms of total assets – Technology, Consumer Cyclicals, and Financials.
Figure 1: Earnings Distortion as of December 3, 2019
Sources: New Constructs, LLC and company filings
Misleading Earnings in the Technology Sector
Investors who only look at GAAP earnings would think the Technology sector is still growing profits. Average GAAP earnings for the 425 companies we cover in the sector improved from $561 million in 2017 to $766 million in 2018, a 37% increase. GAAP earnings increased another 9%, to $833 million, between 2018 and the trailing twelve months period. On the other hand, average core earnings were up 27% between 2017 and 2018 and actually fell 6% from 2018 to TTM.
Figure 2: Technology Sector Average Core Earnings vs. GAAP: 2015-TTM
Sources: New Constructs, LLC and company filings.
Earnings Distortion Reaches Tech Bubble Highs
Figure 3 shows earnings distortion from hidden gains is on a rapid rise and has not been this high since the tech bubble in 2000.
The rapid rise in earnings distortion since 2017 means that an increasing amount of technology firms’ income is coming from unusual or one-time gains, which is not apparent to investors analyzing press releases or income statements. Corporate managers hide (as shown in this HBS and MIT Sloan paper) the one-time nature of these gains by only disclosing them in the fine print. In other words, managers are dressing up the numbers in an increasingly aggressive manner over the last few years.
...Read the Full Post On Seeking Alpha
Author Bio:
Steem Account: @davidtrainer Twitter Account: NewConstructs
Steem Account Status: Unclaimed***
Are you David Trainer? If so, you have a Steem account that is unclaimed with pending cryptocurrency rewards sitting in it from your content. Your account was reserved by the Steemleo team and is receiving the rewards of all posts syndicated from your content on other sites.
If you want to claim this account and the rewards that it has been collecting, please contact the Steemleo team via twitter or discord to claim the account. You can also view the rewards currently sitting in the account by visiting the wallet page for this account.
What is Steemleo Content Syndication?
The Steemleo community is syndicating high-quality financial content from across the internet. We're also creating free Steem accounts for the authors of that content who have not yet discovered the Steem blockchain as a means to monetizing their content and we're listing those accounts as the 100% beneficiaries to all the rewards. If you want to learn more about Steemleo's content syndication strategy, click here.
Posted via Steemleo | A Decentralized Community for Investors
