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Big companies feel pain as high-profile side bets sour: Morning Brief

Myles Udland
Markets Reporter

Friday, November 1, 2019

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Accounting for Juul, GrubHub, WeWork

New accounting rules that took effect last December are wreaking havoc on the bottom lines of big U.S. companies.

On Thursday, Altria became the latest company to take a major profit hit after re-valuing an investment aimed less at improving its current operations but positioning its company for the future. Back in December 2018, Altria took a 35% stake in Juul for $12.8 billion, valuing the vaping company at around $38 billion. On Thursday, the company said its Juul stake was worth $4.5 billion less.

This write down values Juul at around $24 billion, while The Wall Street Journal notes that Fidelity took a writedown on its Juul stake that values the company closer to $20 billion.

And while Altria's hit related to its Juul investment far outweighs the other negative impacts we've seen from big companies making bets on smaller companies, this quarter has featured a number of companies breaking bad news to investors.

An accounting rule effective December 15, 2018 requires companies to report "fair value" for their equity investments. This has resulted in some big bottom-line swings based on the stock performance of what in some cases are side bets or hedges against a company's core business. Investments, in other words, that might be more useful to measure on a longer timeframe than quarter-to-quarter.

On Wednesday, for instance, Yum Brands (YUMrevealed a $60 million, or $0.15 per share, impact related to its investment in GrubHub (GRUB). And this adjustment leaves out the more than 40% decline seen in shares of GrubHub on Tuesday.

Back in 2018, Yum bought $200 million worth of GrubHub stock and a Pizza Hut executive joined GrubHub's board. This investment was and remains an obvious part of how Yum is working to grapple with the future of the QSR industry, as incumbent brands like Taco Bell and KFC which traditionally didn't play in delivery at all are now trying to find solutions for this new world.

In early October, PayPal (PYPLdisclosed a $228 million hit related to its investments in Uber and Latin American e-commerce company MercadoLibre (MELI). But an increase in MercadoLibre shares in the second quarter saw PayPal gain $218 million during that quarter.

The rules giveth and the rules taketh away.

At the outset of earnings season, we highlighted that investment banks including Goldman Sachs (GS) and Jefferies (JEF) were giving investors a sense of how much tech bets like WeWork and Uber (UBER) were hurting their business.

And while the lessons here are many, an overlooked takeaway from this increased volatility during earnings season might be the warning Warren Buffett offered in his 2017 letter to shareholders. Which is that this new rule simply makes unadjusted earnings less useful. It encourages CFOs to find new ways to adjust away any lumpiness during a given period.

Equity investments don't always make money. (Getty Creative)

“The new rule says that the net change in unrealized investment gains and losses in stocks we hold must be included in all net income figures we report to you,” Buffett wrote. “That requirement will produce some truly wild and capricious swings in our GAAP bottom-line.”

Of course, not all the big changes we cited in today's letter are “wild and capricious” per se. It is an understatement, for example, to say Juul is in a different regulatory position today than when Altria took its 35% stake 10 months ago.

But these rules give investors a heightened sense of the success and struggles big public companies have when making investments to diversify their core business. For better or worse.

By Myles Udland, reporter and co-anchor of The Final Round. Follow him @MylesUdland

What to watch today


  • 8:30 a.m. ET: Change in non-farm payrolls, October (+85,000 expected, +136,000 September)

  • 8:30 a.m. ET: Unemployment rate, October (3.6% expected, 3.5% September)

  • 8:30 a.m. ET: Average hourly earnings (MoM: +0.3%, +0.0 in September; YoY +3.0%, 2.9% in September)

  • 9:45 a.m. ET: Markit US Manufacturing PMI, October final (51.5 expected, 51.5 prior)

  • 10 a.m. ET: ISM manufacturing, October (48.9 expected, 47.8 in September)

  • 10 a.m. ET: Construction spending MoM, September (+0.2% expected, +0.1% prior)

  • 10 a.m. ET: Wards total vehicle sales, October (17.00 million expected, 17.19 million in September)



  • 6:55 a.m. ET: Colgate-Palmolive (CL) is expected to report adj. EPS of 70 cents on revenue of $3.94 billion

  • 7:05 a.m. ET: Alibaba (BABA) is expected to report adj. EPS of $10.66 on revenue of $166.7 billion

  • 7:30 a.m. ET: Exxon Mobil (XOM) is expected to report adj. EPS of 67 cents on revenue of $64.79 billion

  • 7:40 a.m. ET: AbbVie (ABBV) is expected to report adj. EPS of $2.27 on revenue of $8.38 billion

  • 8:30 a.m. ET: Chevron (CVX) is expected to report adj. EPS of $1.46 on revenue of $37.67 billion

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