Three Stocks That Could Surprise During Earnings Season

David Trainer  |

Pixabay, Michael Schwarzenberger

Our Earnings Distortion Scores indicate how likely companies are to beat or miss estimates based on how much their estimates contain unusual gains/losses which cause earnings to be over/understated.

Leveraging these scores, and our “novel dataset” of footnotes disclosures (featured in this Harvard Business School & MIT Sloan paper), we’ve identified three large-cap stocks that should surprise when they announce earnings over the coming weeks.

Qualcomm (QCOM) – Earnings Distortion Score: Strong Beat – Earnings Date: 2/5/20 after hours

We previously featured QCOM as a Long Idea on October 16, 2019 in our article “Novel Dataset Reveals Undervalued Tech Giant.” We showed at the time that the company’s earnings were significantly understated and projected that it would beat expectations when it reported earnings in November.

Sure enough, QCOM had a strong earnings beat in Q4, and the stock is up 13% since our article vs. 9% for the S&P 500.

Now, after analyzing the company’s 2019 10-K, we find that its earnings are still understated. In total, we identified $2.23/share (62% of reported EPS) in net unusual expenses in QCOM’s 2019 results. After removing this earnings distortion from GAAP net income, we see that QCOM’s 2019 core earnings of $5.83/share are significantly above its GAAP EPS of $3.60.

The analyst consensus for QCOM’s Q1 2020 earnings is $0.71/share, which comes out to $2.84/share on an annualized basis. Based on GAAP earnings, current analysts’ estimates imply a decline of 21% in annualized earnings. Figure 1 shows that, after removing earnings distortion, consensus estimates imply a much more significant decline of 51%.

Figure 1: QCOM Core Earnings Vs. GAAP: 2016-Q1 2020

Click to enlarge

Image Source: New Constructs, LLC

Sources: New Constructs, LLC and company filings

Lam Research (LRCX) – Earnings Distortion Score: Beat – Earnings Date: 1/29/20 after hours

Most recently we featured LRCX in our December 18, 2019 article, “Two Stocks That Should Beat Earnings Expectations.” We’ve previously featured LRCX as a Long Idea on June 12, 2017 in our article “Selling Shovels in a Gold Rush: Buy This Sector to Profit From the Internet of Things.” We reiterated the stock in our article This Pick and Shovel Stock is Still a Value on May 23, 2018.

Since our original article in June 2017, LRCX is up 92% while the S&P 500 is up 35%.

In our recent article, we pointed out that LRCX’s earnings are understated due to earnings distortion and that the stock should Beat earnings based on its Earnings Distortion score.

Over the trailing twelve months (TTM) period, LRCX had -$139 million in net earnings distortion that cause earnings to be understated.

Contributing to this earnings distortion, LRCX disclosed a $64 million (<1% of assets) tax charge as a result of U.S. tax reform in its 2019 10-K.

In total, we identified $0.89/share (7% of TTM reported EPS) in earnings distortion in LRCX’s TTM results. After removing this earnings distortion from GAAP net income, we see that LRCX’s core earnings of $14.48/share are significantly above its GAAP EPS of $13.59.

The analyst consensus for LRCX’s fiscal Q2 earnings is $3.84/share, which comes out to $15.36/share on an annualized basis. Based on GAAP earnings, current analysts’ estimates imply a 13% increase in annualized earnings. Figure 2 shows that, after removing earnings distortion, consensus estimates imply a much lower increase of just 6%.

Increasing the likelihood that LRCX beats earnings expectations, its comp for the upcoming quarter – 2Q 2020 – should be especially favorable. In the year ago quarter, the company disclosed a $22 million loss on deferred compensation plan assets. Taken together, LRCX looks well set up to beat expectations.

Figure 2: LRCX Core Earnings Vs. GAAP: 2016-Fiscal Q2 2020

Click to enlarge

Image Source: New Constructs, LLC

Sources: New Constructs, LLC and company filings

Pfizer (PFE) – Earnings Distortion Score: Strong Miss – Earnings Date: 1/28/20 before open

PFE’s earnings are overstated due to earnings distortion and the stock should strongly miss earnings based on its Earnings Distortion score.

Over the trailing twelve months (TTM) period, PFE had $5.3 billion in net earnings distortion that cause earnings to be overstated. The most notable unusual income stems from an $8.1 billion gain on the completion of the Consumer Healthcare joint venture with GlaxoSmithKline (GSK), reported in 3Q19.

This unusual income was partially offset by non-recurring expenses, such as $3.1 billion in asset impairments in PFE’s 2018 10-K.

In total, we identified $0.93/share (33% of TTM reported EPS) in earnings distortion in PFE’s TTM results. After removing this earnings distortion from GAAP net income, we see that PFE’s core earnings of $1.89/share are significantly below its GAAP EPS of $2.82.

The analyst consensus for PFE’s Q4 earnings is $0.57/share, which comes out to $2.28/share on an annualized basis. Based on GAAP earnings, current analysts’ estimates imply a 19% decrease in annualized earnings. Figure 3 shows that, after removing earnings distortion, consensus estimates imply a much higher and more optimistic increase of 20%.

Figure 3: PFE Core Earnings Vs. GAAP: 2016- Q4 2019

Click to enlarge

Image Source: New Constructs, LLC

Sources: New Constructs, LLC and company filings

This article originally published on January 17, 2020.

Disclosure: David Trainer, Kyle Guske II, and Sam McBride receive no compensation to write about any specific stock, sector or theme.

_____

Equities Contributor: David Trainer

Source: Equities News

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer. The author of this article, or a firm that employs the author, is a holder of the following securities mentioned in this article : None


Discover: Trending Events

United Nations
EU Parliament
Humanity 2.0
World Economic Forum

Companies

Symbol Name Price Change % Volume
LRCX Lam Research Corporation 333.85 8.51 2.62 1,539,562 Trade
PFE Pfizer Inc. 36.23 -0.09 -0.25 16,841,537 Trade
QCOM QUALCOMM Incorporated 90.56 2.53 2.87 7,821,593 Trade

Comments

Watchlist

Symbol Last Price Change % Change
AAPL

     
AMZN

     
HD

     
JPM

     
IBM

     
BA

     
WMT

     
DIS

     
GOOG

     
XOM

     
BRK.A

     
FB

     
JNJ

     
WFC

     
T

     
NFLX

     
TSLA

     
V

     
UNH

     
PG

     

Blockchain in Fintech - Discussion at the EU Parliament

From the recent Blockchain For Europe Summit in Brussels: Panel on Financial Market Infrastructure