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The Danger Zone Pick: 11/26/12

Monday, November 26th, 2012

Check out my latest Danger Zone interview with Chuck Jaffe of

General Electric (GE) is in the DangerZone today.
When digging through the company’s latest annual report, I found a surprisingly large amount of non-recurring income items that caused GE’s expenses to be understated.

GE is not doing anything illegal or, for that matter, highly unusual. However, including non-recurring income items in operating expense line items like cost of sales, SGA and depreciation is misleading. This practice is misleading because it leads investors to believe that the operating income of the company is much higher than it really is after removing the non-recurring income from the expenses.

The only way for investors to find out if companies are burying non-recurring or unusual items in the normal income statement line items (it happens in both the revenue and expense items) is to carefully analyze the footnotes and the MD&A sections of the annual reports. This work is very difficult and time consuming, but it is required for those investors who want to do their due diligence.
In Red Flag Report: Hidden Expenses/Income: What You Don’t Know Can Cost You, I detail the cost/benefit of analyzing the footnotes and the MD&A. Most investors will be surprised to learn that we found over 13,000 one-time items buried in normal line items in the MD&A and Footnotes of 10-K filings from 1998 thru 2/15/2011. And don’t think for a second that these one-time items are not material. During the last reported fiscal year, companies concealed over $41 billion in one-time items.

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  1. varadha says:

    Terrific, yet simple analysis. I’ve always been a fan of ROIC as a measure of capital efficiency and believe that no size/growth outperformance can replace the quest for efficiency.

    Sort of like a big gas guzzling v8 that needs ever increasing gallons of fuel to keep its engine running

  2. David says:

    But Angie’s $90 per user acquisition cost is going to go away. That’s what their approach probably is. How would their outlook be if that $90 cost dropped down to a total cost of $3 per user?

  3. David:

    That would be great, but cost per user acquisition is not something that’s very easy for a company to fix. ANGI can slash their marketing budget to the bone, but then they would stop acquiring new members. They would probably lose members in fact, as their membership renewal rate is at ~75% and declining. If they cut marketing expense by ~95% as you seem to be suggesting, ANGI might be able to eke out 1 year of slight profits, but they would start shedding members and losing money very quickly. ANGI’s only hope is to keep its marketing budget high and hope it can reach the scale and brand awareness to be able to sustain its business while scaling back marketing costs enough to turn a profit. The fact that ANGI’s revenue growth is slowing down even as its marketing costs keep increasing makes it very unlikely it will achieve that goal.

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