Forget all the “earnings season” analysis you read last month. The real earnings season—annual 10-K filing season—is happening right now.
Every year in this six-week stretch from mid-February through the end of March, we parse and analyze roughly 2,000 10-Ks to update our models for companies with a 12/31 fiscal year end. Our analysts work tirelessly to uncover red flags hidden in the footnotes and make our models the best in the business.
There’s no way we could analyze so many filings in such a short without our engineering team’s help. Using machine learning and natural language processing, we automate much of the rote work of data gathering and modeling. Our technology frees our analysts up to spend more time on the complicated and unusual data points that other firms miss.
For much of the past decade, Crispin Odey has been waiting for inflation to rear its ugly head. The fund manager has been positioned to take advantage of rising prices in his flagship hedge fund, the Odey European Fund, and has been trying to warn his investors about the risks of inflation through his annual Read More
Investors understand that analyzing all financial statements and footnotes is an essential part of the diligence needed to fulfill the fiduciary duty of care. How else can one make the necessary adjustments to assess a company’s true earnings and return on invested capital (ROIC)? Our innovation is to scale this diligence and make it easily accessible to our subscribers.
What We Accomplished Yesterday
Figure 1 shows the work our analysts did yesterday and over the entirety of this filing season so far.
Figure 1: 10-K Filing Season Diligence
Sources: New Constructs, LLC and company filings.
Yesterday, our analysts parsed 92 filings and collected 13,987 data points. In total, they made 2,451 adjustments with a dollar value of $1.6 trillion. That breaks down into:
- 1,042 income statement adjustments with a total value of $111 billion
- 1,016 balance sheet adjustments with a total value of $668 billion
- 393 valuation adjustments with a total value of $780 billion
In particular, Senior Analyst Hunter Gray found an unusual item in Advanced Micro Devices’ (AMD: $14/share) 10-K.
Like many firms, Advanced Micro Devices has non-operating expenses hidden in operating earnings. Non-operating expenses are unusual charges that don’t appear on the income statement because they are bundled in other line items. Without careful footnotes research, investors would never know that these non-recurring expenses distort GAAP numbers by lowering operating earnings.
In 2016, AMD took a $340 million (8% of reported revenue) charge related to a warrant agreement they entered into with West Coast Hitech L.P. This adjustment removes that non-operating expense and reduces AMD’s pre-tax operating loss by $340 million.
After all adjustments, AMD’s operating profit (NOPAT) in 2016 was -$124 million compared to GAAP net income of -$497 million. Without this adjustment one cannot get the true recurring profits of AMD’s business.
This article originally published here on February 23, 2017.
Disclosure: David Trainer, Hunter Gray, Kyle Guske II, Kyle Martone, and Sam McBride receive no compensation to write about any specific stock, sector, style, or theme.
Article by Kyle Guske II, New Constructs