- Forget all the "earnings season" analysis you read last month. The real earnings season - annual 10-K filing season - is happening right now.
- On day 12, analysts parsed 49 10-K filings and collected 6,142 data points. In total, they made 1,001 forensic accounting adjustments with a dollar value of $99 billion.
- These adjustments allow us to assess a company’s true earnings and return on invested capital.
For March 7, 2018, our forensic accounting red flag comes from a pharmaceutical company with a significant hidden liability.
We pulled this highlight from yesterday’s research of 49 10-K filings, from which our Robo-Analyst technology collected 6,142 data points. Our analyst team used this data to make 1,001 forensic accounting adjustments with a dollar value of $99 billion. The adjustments were applied as follows:
- 441 income statement adjustments with a total value of $5 billion
- 395 balance sheet adjustments with a total value of $49 billion
- 165 valuation adjustments with a total value of $44 billion
Figure 1: Filing Season Diligence for Wednesday, March 7th
Sources: New Constructs, LLC and company filings.
We believe this research is necessary to fulfill the Fiduciary Duty of Care. Ernst & Young’s recent white paper, “Getting ROIC Right”, demonstrates how these adjustments contribute to meaningfully superior models and metrics.
Today’s Forensic Accounting Needle in a Haystack Is for Pharmaceuticals Investors
The Robo-Analyst found an unusual item yesterday in Zogenix’s (ZGNX) 10-K.
On page 25 of the footnotes (page 95 overall), ZGNX includes a table detailing its stock option activity for 2017. At the end of 2017, the company had 3.4 million outstanding employee stock options with a weighted average exercise price of $14.41/share, down from $15.46/share at the end of 2016. Crucially, even as the exercise price of these options declined, ZGNX stock more than tripled in 2017, going from ~$12/share to over $40/share.
At the current stock price of ~$44/share, the fair value of ZGNX’s outstanding employee stock options is $78 million (5% of market cap). Investors that don’t account for these options are missing a significant source of future dilution and overvaluing the stock.
This article originally published on March 8, 2018.
Disclosure: David Trainer and Sam McBride receive no compensation to write about any specific stock, sector, style, or theme.
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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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