Core earnings from Decision Point
Decision Point Alert
By Carl Swenlin
April 5, 2003
**************************
Substantial portions of this report have been omitted in deference to paid
subscribers.
***********************
THE REAL P/E RATIO
The "as reported" P/E for the S&P 500 (a.k.a. earnings based on GAAP --
Generally Accepted Accounting Principals) is the historical standard for
reporting earnings. The normal range for GAAP P/E ratio is between 10
(undervalued) to 20 (overvalued). The investment sales industry would like us
to think that "pro forma" or "operating earnings" is the same as GAAP, but
operating earnings are a fabrication prone to gross distortion. There is no
standard by which operating earnings can be judged because operating earnings
are not based on real accounting -- all revenue is included, but selective
expenses are ignored. This version is becoming known as EBBS (Earnings Before
Bad Stuff). Standard & Poors has introduced a third version called "core"
earnings, which is more critical and analytical than the other two, and is
designed to reveal the true condition of the company. We can only use GAAP
earnings for historical comparisons, because there is no historical record for
the other two. Core earnings should be used for individual company value
analysis. Pro forma earnings should be ignored.
The following are based on S&P 500 12-month trailing earnings as of Q4 2002
(Source: Standard & Poors). The estimated P/E is calculated by dividing the
most recent S&P 500 close by the EPS:
"As Reported" (GAAP) EPS is $28.00; P/E is 31.39.
"Core" EPS is $23.75; P/E is 37.00.
"Pro Forma" EPS is $45.98; P/E is 19.11.
Based upon the latest GAAP earnings the following would be the approximate S&P
500 values at the cardinal points of the normal historical value range. They
are calculated simply by multiplying the GAAP EPS by 10, 15, and 20:
Undervalued (P/E = 10): 280
Fair Value (P/E = 15): 420
Overvalued (P/E = 20): 560
EARNINGS UPDATE: According to the spreadsheet we download from the Standard &
Poors web site, as of March 19, S&P 500 earnings reporting for Q4 2002 is 99%
complete, and we note that these results are now being reported by S&P to
Barron's, so we are using them in our current calculations (above). "As
reported" earnings (based on Generally Accepted Accounting Principals, GAAP)
are $3.41/share. This is down 60% from Q3 and down 37% from the same quarter a
year ago.
Looking forward to results for Q1 2003, we note that GAAP estimates are for
$11.43/share, a mere 235% increase. Current GAAP estimates for 2003 are
$34.86/share, a 25% increase over 2002. |
