Perhaps it’s better to have loved and lost than never to have loved at all, as the saying goes. But some investors are wondering if it’s a big deal to see companies, that were making money, now losing it.
There are nine companies in the Standard & Poor’s 500 index, including contract oil drillerEnsco (ESV), food processor ConAgra (CAG) and furniture company Leggett & Platt (LEG) that posted a net loss during the second calendar quarter after being profitable.
Don’t think these are just companies that have been losing money all along or that the second quarter is always rough. All nine companies posted net profit both in the second quarter of 2014 and also in all of calendar 2013. It’s important to note net income includes all charges, even the unusual ones, that accountants require companies to take against profit to give a complete picture of their profitability.
Investors like to say such special charges don’t matter because they may not be reoccurring. And certainly, stripping out extraordinary charges is necessarily when comparing companies’ results to estimates as investors like to do every quarter. Analysts can’t forecast unusual charges ahead of time. Yet, when just looking at companies that swung to a loss, it’s important to look at extraordinary charges as the are costs to investors and other stakeholders.
Take the example of Ensco, which is the most dramatic case among the nine stocks. It’s just one of four energy stocks that swung from making profits to posting a loss in the second calendar quarter. The company reported a loss of $1.2 billion during the second calendar quarter, a complete reversal from the $360.9 million it earned in the second quarter of 2013.
What’s to blame? The company took a massive $991.5 million impairment charge during the quarter. Investors almost instinctively think they should just ignore that. But not so fast. The company says in its regulatory filing the business of providing floating drilling equipment has “deteriorated.” Primarily it’s just the “premium, high-specification rigs” that are being rented out. With this reality, the company has decided to sell five of its floater rigs, resulting in a $991.5 million impairment charge. That’s information investors need to know.
Of course, Ensco investors are completely unfazed all this and focused on the fact that the company beat adjusted earnings expectations, which excludes this non-cash charge, by 21%. Shares are flat since the company reported its quarter net loss on July 31.
Chart source: MSN Money
ConAgra posted a $324.2 million loss during the second quarter, which is a somewhat surprising development since the company has been consistently profitable on an annual basis since at least fiscal 2009, says S&P Capital IQ. Even so, ConAgra reported a net loss of $324 million during the second calendar quarter.
Here, the big culprit was another charge investors love to ignore: Impairment of goodwill to the tune of $602.2 million. It’s tempting to simply ignore this charge and most investors will, after all, it’s not a cash charge. But accountants require this hit to be taken since it’s an accounting cost. The company realized its Private Brands business, which makes cereal, pasta, snacks and baked goods, continues to report sales “below our expectations,” according to the regulatory filing. The charges were taken to reflect that the businesses aren’t as valuable as it would appear on the books, following accounting standards.
It can’t be stressed enough that investors like to ignore this kind of thing seeing it as something for the accountants to debate at bookkeeping conventions. As far as Conagra investors were concerned, the company matched expectations by reporting a quarter adjusted profit of 55 cents a share. Shares are up nearly 10% since the company reported its net quarterly loss.