Adjusted financial results can confuse investors, but you can use them to your advantage
Restaurant chain McDonald's Corp.(MCD) recently said first-quarter sales slipped 1% from a year earlier. But on a " constant currencies" basis, sales actually increased 3%.
Social-media platform Twitter Inc.(TWTR) posted a first-quarter net loss of $79.7 million. After adjustments, with the exclusion of $150.9 million in stock-based compensation to employees, the company recorded a profit of $102.7 million.
McDonald's (MCD) and Twitter include two sets of numbers in their quarterly earnings press releases, as do 93% of companies that comprise the benchmark S&P 500 Index. One set conforms to the Financial Accounting Standards Board's generally accepted accounting principles, or GAAP, which is required by regulators. The other usually is referred to as " adjusted." Some analysts and investors prefer to call them "funny" numbers.
Regardless, sophisticated investors would do well to understand both sets. In McDonald's(MCD) case, the so-called "non- GAAP" figures show that the rising value of the dollar against other currencies has hurt sales and, by extension, earnings. GAAP numbers exclude the effect of currency fluctuations.
The 3% increase in sales, though small, was salient. That's because Oak Brook, Ill.-based McDonald's(MCD) was mired in sluggish growth under its previous CEO. After Steve Easterbrook took over in March 2015, the company began making changes, including rolling out all-day breakfast in October. Fourth-quarter comparable-store sales were up 5%. Total sales were down 4%, but up 5% on an adjusted basis. As a result of its continued improvement, the company's shares have soared 40% over the past 12 months.
In Twitter's case, excluding stock-based compensation -- totaling a staggering $150.9 million in the first quarter -- masked the fact that the San Francisco-based company is spending wildly, especially on its top executives. One could, of course, argue that focusing on the adjusted numbers is right and proper, since giving new shares to executives doesn't cause the company's cash pile to shrink. Then again, the ownership share of investors who aren't receiving the stock- based compensation is being diluted significantly, quarter after quarter.
See: Twitter's executive gravy train is much bigger than Facebook's, Yahoo's(YHOO) (http://www.marketwatch.com/story/ twitters-executive-gravy-train-is-much-bigger-than-facebooks-yahoos-2016-04-27)
Adjusted numbers typically exclude one-time events, such as the write-down of assets that have lost value, legal settlements, merger-related charges and so forth. For example, asset-impairment write-downs have hurt many oil and gas companies over the past year as the price of crude oil has crashed.
"Executives believe their management-accounting information is more representative of their businesses going forward than the GAAP numbers," Kenneth Daly, CEO of the National Association of Corporate Directors, said in an interview. "For new-economy companies, what people are interested in has nothing to do with accounting data. An example for Twitter is monthly users, a non-accounting measure, for sure."
Twitter's average monthly user count increased 3% in the first quarter, as revenue jumped 36%. The stock is down 61% in the past 12 months, reflecting investors' disappointment with user growth.
Read:The New York Times uses the same accounting techniques the paper critiques (http://www.marketwatch.com/story/the- new-york-times-uses-the-same-accounting-techniques-the-paper-critiques-2016-05-04)
To be sure, GAAP numbers are useful, especially because they provide a uniform way to look at companies' financial results. It's about comparing apples to apples.
But some investors think little of the GAAP results, since they are backward-looking, while some non-GAAP numbers, such as user or subscriber growth, more clearly point the way to rising revenue and, potentially, profits. Moreover, non-GAAP numbers can fill in gaps missed by the required reporting rules.
How many companies report non-GAAP numbers?
A total of 467 companies in the S&P 500 reported non-GAAP numbers in the past 12 months, according to FactSet. Among them, 361, or 77%, reported non-GAAP earnings per share that were higher than GAAP earnings per share.
Here are the 26 S&P 500 companies with negative GAAP EPS that reported combined positive non-GAAP EPS over the past four quarters, through Thursday: Company Ticker Industry GAAP EPS - past 12 months Non-GAAP EPS - past 12 months Alcoa Inc.(AA) US:AA Aluminum -$0.27
$0.37 American International Group Inc. (AIG) US:AIG Multi-line Insurance -$0.53$1.46Boston Scientific Corp.(BSX) US:BSX Medical Specialties -$0.04$0.66CenterPoint Energy Inc.(CNP) US:CNP Electric Utilities -$1.61$1.10ConAgra Foods Inc.(CAG) US:CAG Food: Major Diversified -$1.39$2.43Concho Resources Inc.(CXO) US:CXO Oil & Gas Production -$7.49$0.59Devon Energy Corp.(DVN) US:DVN Oil & Gas Production -$32.87$1.78Endo International PLC(ENDP) US:ENDP Pharmaceuticals -$7.41$4.54Entergy Corp.(ETR) US:ETR Electric Utilities -$1.37$5.66Frontier Communications Inc. US:FTR Telecommunications -$0.45$0.12Halliburton Co.(HAL) US:HAL Oilfield Services/ Equipment -$0.79$1.13Johnson Controls Inc.(JCI) US:JCI Auto Parts: OEM -$0.31$3.63Kraft Heinz Co.(KHC) US:KHC Food: Major Diversified -$0.23$2.77L-3 Communications Holdings Inc.(LLL) US:LLL Aerospace and Defense -$2.35$2.74Legg Mason Inc.(LM) US:LM Investment Managers -$0.32$3.33National Oilwell Varco Inc.(NOV) US:NOV Oilfield Services/ Equipment -$3.23$1.55Newfield Exploration Co.(NFX) US:NFX Oil and Gas Production -$21.20$0.88News Corp.(NWSA) Class A US:NWSA Publishing: Newspapers -$0.50$0.36Owens-Illinois Inc.(OI) US:OI Containers/ Packaging -$0.50$2.05Perrigo Co. PLC(PRGO) US:PRGO Pharmaceuticals -$0.26$6.87Qorvo Inc.(QRVO) US:QRVO Semiconductors -$0.22$3.42Range Resources Corp.(RRC) US:RRC Oil & Gas Production -$5.00$0.19Teradata Corp.(TDC) US:TDC Information Technology Services -$0.86$1.95Williams Cos. Inc. US:WMB Oil & Gas Pipelines -$0.93$0.41Yahoo Inc.(YHOO) US:YHOO Internet Software/ Services -$4.74$0.03Zimmer Biomet Holdings Inc.(ZBH) US:ZBH Medical Specialties -$0.14$5.85 Source: FactSet
If you invest in shares of individual companies, it's important to understand how the GAAP and non-GAAP numbers are related. If you don't take the extra time to consider how a company is really performing, it's probably better for you to invest in mutual funds.
Also see:Typically clean Apple dips its toes into use of made-up metrics (http://www.marketwatch.com/story/typically- clean-apple-dips-its-toes-into-use-of-made-up-metrics-2016-05-02)
-Philip van Doorn; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires 05-10-160820ET Copyright (c) 2016 Dow Jones & Company, Inc.
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