Discretionary Revenue Recognition
Five consumer discretionary names with anomalies in their latest revenue numbers
In an investing world obsessed with ratios and valuation metrics, it is often easy for investors to lose sight of the fact that every non-cash accounting number that goes into those ratios is based on estimates that can materially impact their value. Revenue, a seemingly simple indicator of what a company sold in a given period, is actually derived from multiple assumptions about what the future holds. Investors who don’t appreciate and evaluate those assumptions are, to a degree, flying blind.
We examined this concept in our January piece Bill and You Shall Receive (Most of the Time), where we analyzed the accounts receivable of over 70 industrial companies and focused on several that were benefitting from a decline in their bad debt reserves. For today’s report, we examined the latest quarter’s revenue-related disclosures for over 50 consumer discretionary names with market caps of over $4 billion and focused on five with unusual benefits that investors should be aware of. Our concerns included items such as:
Falling allowances for bad debts, chargebacks, and/or discounts
Unsustainable cuts or credits to provision expense
Declines in reserves for warranties
Unsustainable benefits from factoring receivables
The introduction to our "Bill and You Shall Receive" report (linked above) includes a guide outlining key factors analysts should consider when examining a company’s receivables. Also, for readers wanting a more thorough discussion of revenue recognition, we recommend reviewing some of our first substacks that are available for free including:
Now, let’s get Behind the Numbers…