Tech Red Flags Notes (CSCO, ITRI)
Introduction to our new Red Flag Notes
In today’s edition of Peek Behind the Numbers, we're excited to unveil a new type of report that will become a regular feature alongside our existing content. This new series is in addition to our customary reports delving into earnings quality themes and conducting in-depth analyses of the financial reports of well-known companies.
We regularly screen SEC filings for indications of earnings management or unusual accounting-related benefits that investors may not be taking into consideration. However, this is just a first step and regular readers know that we take the initial results of any screen or ratio analysis with a grain of salt. In our experience, the typical red flag can be explained away after an examination of a change in trends or unusual occurrences during the periods that are skewing the results. However, if there is no obvious explanation, it may be time to do further digging to see how deep the problem goes. More importantly, it is time to pay special attention to that company’s results in future quarters to see if the problems persist or if more develop.
Our Red Flag Notes will give you glimpses into some widely-held names that are still around after our first round of vetting. We believe investors should be aware of these potential problems and we may do more work on these names in the future which could result in reports that take a deeper dive into the company’s earnings quality.
We question the validity of an earnings beat when a company picks up a meaningful amount of earnings from a source that on the surface appears to be unsustainable or one-time in nature. These reports will not repeat headlines about raising or cutting guidance but will look for more hidden earnings drivers like changes in accruals, working capital movements, non-GAAP earnings definitions, or expenses coming in below guidance.
Also, please note that these reports are not replacing but are in addition to our regular earnings quality theme reports and periodic deep dives.
This issue features notes on Cisco Systems (CSCO) and Itron, inc. (ITRI).
Now let’s get behind the numbers…