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Pastimes : Clown-Free Zone... sorry, no clowns allowed

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To: Les H who wrote (237779)	4/26/2003 8:42:38 PM
From: Giordano Bruno	Read Replies (1) of 436258

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 current 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 32.10. "Core" EPS is $23.75; P/E is 37.84. "Pro Forma" EPS is $45.98; P/E is 19.55. 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: Earnings reporting for Q1 2003 is just beginning, and we can monitor the progress using the spreadsheet we download from the Standard & Poors web site. The latest is dated April 23 and about one-third of S&P 500 companies have reported Q1 results. It is interesting to watch original estimates being adjusted as actual results are reported. Most interesting is that pro forma estimates/results are moving higher (from $11.96 to $12.39), while GAAP results have moved slightly lower (from $11.43 to $11.40). This indicates that "earnings improvements" we are hearing about are being engineered in the pro forma dreamscape, not reality. Using Q1 GAAP estimates the P/E would be about 30.57, slightly improved over the 12-month period ending December 2002, but still grotesquely overvalued. decisionpoint.com

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