The Bezel: Most Companies Will Use This Turmoil To Re-Base Their Earnings

During his recent conversation with Tobias, Stephen Clapham, founder of Behind The Balance Sheet, discussed why Most Companies Will Use This Turmoil To Re-Base Their Earnings. Here’s an excerpt from the interview:

Tobias Carlisle:
John Kenneth Galbraith used to call the difference between the reported numbers and what was actually happening underneath as the bezel.

Stephen Clapham:
The bezel, yeah.

Tobias Carlisle:
And the bezel was often only revealed in the crash or after the crash, and so I just wonder this time, given that we’re having a coronavirus slowdown, or it’s going to be blamed on coronavirus. I have a theory that the yield curve inversion occurred here in June or July last year and there are many, many indicators that the world was going into a slowdown and I think coronavirus is sort of the catalyst or the trigger rather than the underlying root cause. But I fully expect that they’re going to use this quarter to big bath a whole lot of accounting, and so I think there’ll be some horrible accounts that come through the other side. Are there any companies that you might be looking at that you think might show their true colors in the next quarter or so?

Stephen Clapham:
It’s difficult to single a few companies out, because I think they’re all asset. The companies that don’t I think will be exceptional. You’re laughing, but let me tell you, I went to probably 20 analyst meetings at the time that I was building the forensic accounting course, so the second and third quarter of 2018. 15, 20 analyst meetings. Every single meeting I went to, I came away with an example of accounting chicanery that I used in the course. There wasn’t a single meeting that I went to that I could not find some name that they were doing wrong.

Stephen Clapham:
Now, I’ve been doing this for a long time, and admittedly, normally I go to analyst meetings, I’m thinking about investment. But I’m an account space analyst, and if companies are cheating, I would always go, “Oh, that looks a bit naughty.” I don’t recall a period, and I’ve been doing this for a long time. I don’t recall a period ever when companies were cheating as much. So if you can find me a company that comes out the other side of this horrible situation without adjusting its numbers, I’ll be very surprised. I’m sure there’s one. I’m sure there’s a dozen, but honestly 90% … more than 90% of the companies will be using this as an opportunity to re-base their earnings.

Stephen Clapham:
I’ve been getting a lot of very bullish comments. We’re doing this the day after Bill Ackman revealed that he made 100 times his $27 million investment, which is absolutely heroic, and that he’s super bullish. I think it was last night or two nights ago, Whitney Tillson called the bottom of the stock market. Whitnye, I salute you. The fact is, that none of us know what’s going to happen on the other side of this virus, but the one thing that you can be absolutely confident of is there is going to be a cash flow squeeze across the world.

Stephen Clapham:
I’ve got a very small business and most of my clients are required to pay in advance. I have a few clients for various reasons I haven’t invoiced. Not one of them has paid me. It may be that they’re all locked away at home and they can’t get to their bank. It’s possible. Unlikely, but possible. I tell a lie, actually. There is one client who’s paid me. It’s very nice that the member of a very wealthy family who’s working in the family office and I’m helping train her one to one in how to look at the accounts and how to analyze businesses and she’s paid me. But she’s a nice person and they’ve got a lot of money.

Stephen Clapham:
This is a microcosm of what’s going to happen. Nobody’s going to be paying each other, and working capital, I think, has been very stretched. I haven’t done a very detailed analysis of this, but I’ve looked at a number of industrial companies where in the last 15 years they’ve massively improved their collection cycle. So collection cycle for a company like Electrolux has gone from 70 days probably to zero. A huge improvement. Maybe it was 50 days and it’s gone to zero.

Stephen Clapham:
So you think, “Whoa, isn’t that fantastic? The company’s become really much more efficient in its use of capital.” It’s become much more efficient but not be reducing its inventory. Its inventory days, its debtor days are flat over the last 15 days. What it’s done, is it stopped paying people. It’s now got a hundred days of payables. Well guess what’s going to happen? Those days are going to shrink. They’re going to have to shrink because all its supply chain is going to be desperate for money. So what you’re going to see is many of your listeners will not even know what a rights issue is. When I started in the stock market, you had to know how to work out the theoretical at the right price. Well, I can’t remember, honestly. I can’t remember the last time I had to work one up. I’d have to go and look up what the formula was, it’s so long since I did it.

Stephen Clapham:
Well, guess what? We’re going to be finding out how to do that very soon because there’s going to be a big change as a result of all of this and the other big change will be you see a load of accounting adjustments.

You can find out more about Tobias’ podcast here – The Acquirers Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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