ADJUSTED EPS: TAKE THE GOOD, LEAVE THE BAD

As a former CPA, I know that from an accounting perspective, accelerating expenses is considered “conservative”. As a financial analyst I disagree. Big charges certainly suppress current GAAP earnings. However, companies know that analysts exclude big charges and expenses as one-time items in their calculations of “operating” EPS. Moreover, big charges can reduce future periodic expenses and obviously inflate forward EPS. That sounds aggressive to me, not conservative.

Many companies assist the analysts by providing Adjusted EPS. My analysis shows that in most cases Adjusted EPS just excludes bad stuff. Looking back at the last 6 quarters in my universe, gaming companies are clearly the most egregious offenders while leisure companies tend to shy away from the adjustment game. Lodgers fall somewhere in the middle. Gaming companies provided Adjusted EPS that was higher than GAAP EPS an astonishing 80% of the time. Contrast this with the leisure group at only 7%. Within the gaming sector, BYD, LVS, and PNK are perfect with their Adjusted EPS batting average exceeding GAAP, and WYNN is not far behind. We at Research Edge are not big fans of EPS to measure valuation and this is just one more reason why.


Gamers consistently report Adj EPS higher than GAAP