Wednesday, August 19, 2015

Profits aren't actually growing — companies are just fudging the numbers more than usual

Profits aren't actually growing — companies are just fudging the numbers more than usual

Something peculiar and worrisome is going on right now. Deutsche Bank's David Bianco examines it in a troubling note titled "Stretching To Hit Numbers?: GAAP vs. Non-GAAP S&P EPS Spread Widens."

"The GAAP/non-GAAP S&P EPS ratio deteriorated from 94% during 1Q13-3Q14 to 78% the past 3 quarters," Bianco writes. "Loss on asset sales, asset/ goodwill impairments and restructuring costs lowered the ratio significantly at Energy, Industrials & Materials. Higher M&A costs and excluded stock compensation dragged the ratio lower at Tech, Staples & Healthcare. Pension losses lowered the 4Q ratio too."

The twisted part of all this is that earnings per share on a GAAP basis are down.

"The S&P avoided down EPS in 1H15, up ~2% y/y on non-GAAP EPS, but the GAAP EPS declined by 13% y/y," Bianco added. "We have always argued that the best EPS measure lies somewhere between GAAP and non-GAAP EPS."

It's worth noting that sales at S&P 500 companies actually fell during the quarter. So any EPS growth is due to fatter profit margins and shrinking share counts.

IT'S NOTHING BUT LIES AND SMOKE AND MIRRORS!


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