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Strategies & Market Trends : Bob Brinker: Market Savant & Radio Host
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To: MrGreenJeans who wrote (5150)5/24/1998 9:26:00 AM
From: Boca_PETE  Read Replies (2) of 42834
 
Mr. GJ: RE:<Comparing 1962 vs. 1998 P/E's>

Earnings reported in 1962 are not comparable to those reported in 1998 (APPLES and ORANGES) because required accounting principles have changed substantially in many areas. Some examples include:

1.) Many leases are now required to be capitalized and accounted for as if leased property is owned.

2.) Pension and Other Post Retirement Health Benefits previously charged to earnings when benefits were paid are now required to be charged to earnings over the working life of employees.

3.) The rules for charging deferred income tax to earnings are substantially different in 1998.

4.) Current rules for computing Earnings Per Share require adding additional shares for outstanding convertible securities, stock options and warrants, whereas in 1962 I believe that only average outstanding common shares were divided into earnings.

5.) Currency translation accounting is substantially different under current rules.

6.) Current rules prohibit accounting for a merger as a partial "pooling-of-interest" and stringently limit accounting for mergers as a 100% pooling. In a "pooling", historical book values, which do not relate to current fair value, are combined - the excess of fair value of consideration paid for the acquired entity is ignored.

Moreover, I believe that most published year-by-year P/E's for the S&P500 use NET INCOME which includes nonrecurring charges and credits, whereas Brinker has asserted many times that the most meaningful earnings figure is Continuing Earnings Per Share from Operations. Now if there were data for this latter number computed with consistant accounting principles, maybe we would have something meaningful.

Of course the "price" side of the p/e equation has been a reaction to reported EPS under the accounting principles required for the year that earnings were reported.

Bottom line is, I'm not terribly comfortable with historical P/E comparisons for the above reasons.

P
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