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The Oldest Trick In The Accounting Book Is Back: How Coke Just "Beat" EPS Despite Sliding Revenues And Profit
One week ago, when the after hours algos sent INTC stock soaring on headline-scanning euphoria by nearly 10% to over $32/share, we did a snap analysis showing that the only reason why Intel beat was because it literally used the oldest trick in the book: instead of its historical tax rate of 28.7%, the company "decided" that a 9.3% tax rate was more appropriate...
... as a result converting a 25% plunge in operating income into flat EPS. Subsequently the algos finally read what we posted, and as of this writing INTC stock was over $4 lower than those after hours peaks from last Wednesday.
Fast forward to today, when moments ago key Dow Jones component Coca Cola (KO) reported that non-GAAP EPS of $0.63, beating expectations of $0.60 and, sure enough, sending its stock higher.
So we decided to take a look at these better than expected earnings and much to our dismay, we found that KO used precisely the same gimmick and yes, the algos fell for it all over again.
Here is how KO reported its Q2 income statement:
Here are the notable outliers:
- 3% drop in revenues
- 4% drop in Profit
- 20% drop in Operating Income
And yet... a 29% increase in pretax Net Income and a 21% increase in EPS.
How is that possible? The answer is highlighted in yellow: "Other [below the line] income" of $1.6 billion.
Here is how KO explains this unexpected boon to the bottom line:
Reported EPS was $0.71 and comparable EPS was $0.63. Items impacting comparability increased reported EPS by a net $0.08 and were primarily related to a net gain recognized in connection with the closing of the transaction with Monster Beverage Corporation, partially offset by costs associated with our previously announced productivity program. For additional details on items impacting comparability, refer to the Reconciliation of GAAP and Non-GAAP Financial Measures schedule
Ok, fine: so Coke did a perfectly acceptable below the line adjustment involving a non-cash benefit from its Monster deal.
We decided to track it down and for that we had to go to Coke's separately filed, 17 page long GAAP to non-GAAP reconciliation, one which puts even Tesla to shame.
This is how KO broke down the Monster adjustment:
And while the income statement bridge is once again perfectly legitimate if subject to management's non-GAAPy interpretation of reality, the one item that does stand out is Coke's revelation that its tax rate, or rather non-GAAP tax rate, is some 6% lower than where it should be: instead of 28.7%, which incidentally is what INTC's tax rate also should have been, KO used a 22.5% "effective" tax rate.
What does this mean? Well, if KO had applied the proper tax rate of 28.7% to its non-GAAP pre tax income of $3.6 billion, the EPS number it would get is not $0.63, but $0.58.
Why is this material? Because Wall Street's consensus estimate for KO EPS was $0.60, or right in the middle.
And that, ladies and gentlemen, is how both Intel and now Coca Cola used the oldest trick in the accounting book to "beat" EPS: by simply using an unrealistically low tax rate and hoping nobody would notice.
Still, even with this clarification out of the way, we are confident the algos will keep buying for one simple reason - the following line in the company's press release:
- We are now targeting full-year 2015 net share repurchases of $2.0 to $2.5 billion.
Because when the company itself is perfectly eager to continue squeezing shorts, there is no point in even attempting "price discovery."
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Got to save those mgmt bonuses at all cost.
GAAP sucks!
Nailgun accounting is working just fine for us.
Whe's bright idea was it to take cocaine out of Coke? Can't we grandfather that back in?
This is not how income taxes work folks. The effective rate is the blended rate they effectively pay in all of the operating jurisdictions, accounting for book to taxc differences etc. The rate on that particular transaction was around 47%, probably a combination of federal and state tax. When you back that out, naturally your overall effective rate, i.e the blended rate on EVERYTHING ELSE will go down. No shenanigans here. And not defending the non-GAAP horseshit, but this analysis is flat out wrong.
+1
also, the CPA audit firm also reviews the Q and K info before release for concurrence (not an audit but reasonableness).
the drop is effective tax rate is surprising & suspicious, but may be accurate for the Quarter (not full year).
Nova
Well Jamie Dimon is richer than me..
OK fine…..
But the real question is he richer than Lloyd Blankfein?
WTF says crime does not pay?
Indeed. What a deal.
Put in almost 80 hours per week
Don't get time to spend with your family and loved ones
Get diabetes, heart disease, hypertension, depression, and myriad other diseases for free.
Earn a huge bonus
Get a divorce and lose half of your wealth
Die from a sudden heart attack.
What a deal. I am dying to get in.
There is a long line of freshly minted MBA's 'dying' to get that deal. Money distorts sanity. Or more accurately money inflames insanity.
Doesn't Uncle Buffy knock back some KO while he is kicking back them regular folks in Omaha?
I see the China selling US Treasuries post has floated back up to the top.....I'm the only guy that saw this coming?
What the hell did Goldman think was going to happen?
Just you, Stvie Wonder, Ronnie Milsap and Laura Ingalls older sisiter,
That's so true.
I have found that many rich folks are very lonely, unhappy and depressed. They have all the wealth in the world, yet they want more. They are rarely satisfied.
Here is a housekeeper's story on the lifestyle of the rich.
http://www.vox.com/2015/7/16/8961799/housekeeper-job-clients
Another thing about the corporate world is that you'll be forced to put in more than 40 hours/week. Your employment contract will say 40 hours, but your boss will gently call you aside and say that if you aren't putting a minimum of 55-60 hours per week, then you are not being challenged by the job, which is another way of saying "be a slave or you're fired".
I don't know about you guys, but when I legally cook books, I always slow roast and not sear.
Whoops! Looks like the accounting meth heads took the company slogan "Share a coke" way too literal.
Seriously KO has THE most effective marketing campaign in all of history for a product that is complete shit.
Boiled Coca Cola
https://www.youtube.com/watch?v=rhkWQnHpaIk
Truth. I can't believe how many land whales I know that tell me their dieting or exercising yet pop a top on a coke, diet or otherwise. It's literally a poison yet the gulp it down.
Diet Coke will go down like Margerine, worse than the thing it was supposed to better.
If I was a Food scientist, I fear I would have to commit suicide.
Roux...?
This game will end soon, no one buys any of this bullshit and the more they lie, the bigger the crash!
"Buffcounting" is it.
Why is it somehow a surprise that they cooked the books? All Corporations are criminal enterprises.
Companies manipulating their stock? Naaaaaa. That'd be dishonest and just down right unamerican!
Yes, creative accounting is a beautiful thing!
Throw spaghetti at the wall.....find the one that sticks.
THIS IS IT!!!
Tell me lies
Tell me sweet little lies
[/Fleetwood Mac]
All the more reason for gold to decline in value.
Looks like market is setting up for all is well Fantastic Friday. Again.
The Farce is Strong.
Accounting was always under the thumb of crooked CEOs but now it seems like a total farce.
I don't get it. If the tax rate is at 28.7% and they pay a non-GAAP of 22.5% then won't they get into the shit with the IRS? Isn't this cooking the books like Toshiba? Fuck this new age accounting: 2 + 2 = whatever the fuck you want it to!
What if Hillary was this dishonest ?
Give her a thousand bucks...and she'll make you a fortune in cattle futures.
The silent behemoth lurking beneath the surface for all of these companies is lack of demand. They can use funny money for buy backs, cook the books, or whatever to make the turn smell nice for a bit but the reality is they're all swimming to the beach as fast as they can as the great white lack of demand eats them alive. Funny fucking thing is they put the shark in the country club pool by robbing the middle class with their excessive greed. Now it's eating at their fucking ankles. Micky D's, GM, Ford, GE, Apple. JFC they deserve it.
Toshiba and Coke get the anal exams .... man bites dog !
Has coke hired jack welch?
I stand in the presence of brilliance!
Shares of MCI soared on the news.
The only entity allowed to legally import cocaine, or cocoa leaves as it were.
Maybe China will reinvent the brand as Koke
it's a bipolar world
everything is a lie
"its easier to fool someone than to convince them they have been fooled" - Mark Twain
Here's the REAL THING, Coca Colla, with coca leaf in it.
http://www.theguardian.com/world/2010/apr/14/coca-colla-real-thing-bolivia
Satan forbids the truth be told ... when it is important (like stock options, bonuses or Wall Street credibility are on the line) one has to lie.
Enron accounting expertise is not as flluid when you hire offshore talent.
/sarc
but I taught dat ol' honkee Boofer like d'KO...if it ok wid d'Boofer, den it ok wid allo' d'peepses...