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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: William Hunt who wrote (72027)	3/13/2001 6:22:54 AM
From: Bruce Brown	Respond to of 99985

jmootx --Interesting that KO still sports a P/E of 58 with no growth is sales worldwide . BEST WISHES BILL Coke is not a stock I follow as closely as I used to any more, but let me just address some of the above simply because perceived 'fact' can become perceived 'reality' can become 'myth' and on and on where it might lead one to make a mistake because one 'accepts' what 'appears' to be information without doing any DD discovery. Plenty of mistakes have been made with capital by all of us in the past, so let me just wax on about the above Coke PE statement. One must do a little fundamental research to realize the 'actual' P/E ratio of Coke. It's lower than 58. Yes, if we use the actual reported TTM EPS of .875, depending on what share price quote one uses, the TTM 'appears' to be 57/58. However, why is that "wrong"? And this is an important thing when doing one's fundamental research. It wouldn't be wise to simply 'short' Coke based on a glance at a printed P/E ratio at Yahoo! or Quicken or SI that says KO's P/E is 58. One could lose money by not digging beyond the surface. Then again, I won't say that Coke's P/E is 'low', but I would want to discover what it actually is. How do we do that? One has to normalize earnings and then excise the one time charges that Coke took in the TTM period. Not only in 2000, but also in 1999. Here are the three past years of EPS of which 1999 and 2000 both had non-recurring charges: 1998 = $1.42 1999 = $0.98 2000 = $0.88 If those unusual, one time charges are backed out, then the normalized TTM EPS is higher than what the EPS reported on financial sites suggest. I don't have the exact EPS figures when one backs out all of the charges in front of me, but minus a truckload of nonrecurring charges, Coke had net income of $3,672 million last year. Last time I figured it all out in early February when taking a glance for some possible non technology investments as well as shorts, Coke's TTM P/E based on a price of $59 a share worked out to a PE ratio of around 37. Certainly a premium to the S&P at the time. Now Coke is trading at $50 and change and the P/E is lower, yet their share price still is commanding a premium. Having followed Coke for plenty of years because it was a previous investment in my portfolio, there are many reasons why it has been given a premium in the past. That's an entirely different topic of discussion, but an important one. Of course, it never hurts to take a look at the EPS estimates for the current fiscal year. Coke management has guided for a 15 - 20% growth in EPS for 2001. Those estimates, after recent revisions, currently stand at $1.71 for year ending 12/01. Based on current share price, that gives an estimated P/E of 29.28 for current fiscal year. In addition, there are some inventory reduction issues to grasp. The planned inventory reduction was not presented as (nor does it represent) a charge to Coke's P&L. CCE made a decision to lower their inventory from 40 some odd days on-hand to 34 days. This resulted in Coke's earnings being $0.12 lower than if the inventory was maintained at the old level of around 40 some odd days. Sales were not accelerated or double-counted in previous periods. The earnings reduction is merely the result of CCE deciding to use inventory on-hand and lower their inventory levels. Conclusion: a lot of factors go into coming up with the TTM P/E ratio of Coke, but it is not 57 or 58 as reported so widely in the typical quote service and passed on as 'fact'. Not that the TTM P/E ratio is low, but it is certainly lower in the 30's than the reported '58'. Another example of a company that is easily misunderstood or misquoted in such regards is Qualcomm. A little investigative fundamental analysis such as Coke discovered would easily show why Qualcomm's true TTM P/E ratio is certainly no where near 370.98 as Yahoo! currently quotes or 349.68 as SI reports. Yet, I've seen a couple of posts on this board in the past couple of weeks in regards to Qualcomm's PE ratio of 400 or something in those regards. Rather than churn through the charges and items which shows what the true TTM PE ratio of Qualcomm is here on this board, I'll just suggest that a strong case could be made for combining fundamental analysis with technical analysis before placing one's capital at risk both on the long or the short side. Suffice it say that Qualcomm's TTM PE as well as estimated PE based on this fiscal year's EPS is attending the same picnic that Coke is attending. This translates all over to blanket reporting of the 'average PE' of the S&P 500 or the Nasdaq 100 = XX or XXX or whatever. Most often, that blanket reporting has failed to scratch below the surface and it is just taken as 'fact' which is too bad on a fundamental basis. Then again, PE taken by itself is only one metric and doesn't really tell us the whole picture. BB