LONDON -- Right now, I'm trawling through the FTSE 100 (UKX) and double-checking for blue chips that may be flattering their profits.
You see, many companies these days report "underlying" earnings, which are calculated by excluding costs the firm deems to be "exceptional." Trouble is, some companies are more cavalier than others when it comes to sweeping awkward expenses away from the headline figures.
Today, I'm looking at Tesco
|
Year to February |
2008 |
2009 |
2010 |
2011 |
2012 |
|---|---|---|---|---|---|
| Profit before unusual items | 2,615 | 2,649 | 2,904 | 3,209 | 3,459 |
| Gains on asset sales | 188 | 236 | 377 | 432 | 376 |
| Asset writedowns | -- | 32 | 26 | -- | -- |
| Goodwill impairment | -- | -- | (131) | -- | -- |
Figures in millions of pounds.
While annual figures can provide some insight into how a business has performed, I reckon looking back over several years provides a better view of possible problems in relation to one-off costs.
So between 2008 and 2012, my stats tell me Tesco reported cumulative profits before exceptional items and tax of 14.8 billion. However, aggregate exceptional costs came to 1.5 billion pounds -- equivalent to 10% of cumulative "underlying" profits.
The majority of Tesco's one-off items relate to its long-standing strategy of selling and then leasing back parts of its vast store portfolio. Often, these stores will have been on Tesco's books for years, if not decades, so there can be a healthy profit recognized on each sale. The downside is that Tesco is then committed to lease payments over many years. Tesco normally leases these stores for either 20 or 30 years. According to its latest annual report, Tesco is now committed to total minimum lease payments of more than 17 billion pounds.
The other notable one-off item was a charge of 131 million back in 2010. This was a writedown relating to Tesco's Japanese business, which it has since decided to sell.
Somebody who always studies earnings numbers in detail is Neil Woodford, the U.K.'s leading equity income fund manager, who sold out of Tesco completely earlier this year. Mr. Woodford's portfolios thrashed the FTSE 100 during the 15 years to 2011, and this exclusive Motley Fool report -- which can be downloaded free today -- reviews his favorite blue-chip shares for 2013 and beyond.
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