Sometimes the down and dirty work is necessary to gain an investing edge. As Peter Lynch said, “The person that turns over the most rocks wins the game.”
Early on in my full time investing career I quickly learned that headline earnings per share numbers do not always tell the true picture of a company’s earnings power and P/E ratio. That is why I never take GAAP or company provided non-GAAP earnings per share at face value. As a refresher, GAAP stands for generally accepted accounting principles and incorporates standards that public companies in the U.S. must adhere to when preparing and publishing financial statements. Unfortunately, GAAP assumptions can incorporate unusual or nonrecurring gains and charges that are not representative of a company’s ongoing earnings.
That is why companies also publish non-GAAP earnings per share, which incorporate adjustments to eliminate certain items from EPS. However, management teams can be too liberal or conservative when they make their adjustments. I talk about the GAAP vs. non-GAAP dilemma in an article I published a few years ago, To GAAP or Non-GAAP That Is The Question, which I encourage you to read to learn more about this topic.
So, why am I bringing this subject up again? Well,on January 14th, 2021, Video Display Corp (OOTC:VIDE), a company we recently added to our coverage universe in order to monitor its restructuring initiatives, issued its third quarter 10Q without any associated press release. At first glance, the numbers looked impressive. Sales rose 95% to $2.9 million, while GAAP EPS rose to $0.31 from a loss of 11 cents per share.
However, after taking a closer look at the financial statements and verbiage in the “management’s discussion and analysis section” on page 20 of the 10Q, it became apparent that had it not been for one time non-operating gains, the company would have lost money for the quarter. It’s also possible that the increase in sales may have been due to lumpy project revenue from a big contract coming to an end. It’s also worth noting that some of the verbiage in the 10Q was positive, indicating some effectiveness in the company‘s restructuring initiatives in some product lines. You can read more about the company’s restructuring progress on pages 15 through 19 of the 10Q. You can also read our september 11, 2020 “reasons for tracking article on VIDE here.
This short case study reminds us of how important it is for us to read between the lines of company qualitative and quantitative narratives. This is especially important when dealing with companies in which we might invest. It also reminds us why we cannot blindly rely on automated stock screeners to streamline our research process, a topic I discuss here and here.
Thanks. Now let’s have a great investing week and turn over some rocks!
~Maj Soueidan, Co-founder GeoInvesting
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