The Corporate Earnings Fiction in Q3

The Biggest Sinners in the Dow.
All 30 companies in the Dow Jones Industrial Average have now reported earnings for the third quarter. As required, they reported these earnings under Generally Accepted Accounting Principles (GAAP). These standardized accounting rules are supposed to allow investors to compare the results of different companies. But that’s too harsh a fate for many of our corporate heroes, and so they proffer their own and much more pleasing accounting strategies – as expressed in ‘adjusted’ earnings and ‘adjusted’ earnings per share (EPS).
Of the 30 companies in the DJIA, 14 reported ‘adjusted’ or ‘non-GAAP’ earnings in Q3 that were significantly higher than their GAAP earnings. Total ‘adjusted’ EPS of these 14 Dow components exceeded their total EPS under GAAP by 26%! Nice work!
‘Adjusted’ earnings are the great American fiction conceived to serve the great American passion: inflating share prices by hook or crook.
The biggest sinner: Merck & Co. miraculously turned its loss of -$0.02 per share under GAAP into an ‘adjusted’ profit of $1.11 a share. This is not a ‘one-time’ event either. Merck keeps showing up in the ignominious top five Dow earnings adjusters time after time. Among the repeat offenders in the top five are also Pfizer, Coca-Cola, and GE.

This post was published at Wolf Street on Nov 19, 2017.