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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: Berney who wrote (33)	3/5/1998 5:54:00 AM
From: porcupine --''''>	Read Replies (1) \| Respond to of 1722

Berney: The difference comes from the distinction between "operating earnings" and "net profit". For example, assume that in 1997 the fictional XYZ Corp. earned $100mil in its ongoing business activities. Its operating earnings, then, would be $100mil. But, further assume that in 1997 one of XYZ's factories, being carried on the books at a value of $100mil, is destroyed by a flood -- and that floods are not covered by XYZ's insurance. Under these circumstances, XYZ has suffered a (hopefully) "nonrecurring" or "extraordinary" loss of $100mil. By this reckoning, "net profit" is zero, and XYZ's p/e is "NM" (not meaningful). The news services that feed financial info to newspapers generally use these net profit figures in computing p/e. However, Value Line, because it is interested in projecting future earnings power (and so assumes that floods, etc., will not keep recurring), uses operating earnings in calculating its ratios, and would therefore use the $100mil operating earnings figure in computing XYZ's p/e. Boeing merged with McDonnell Douglas, and Int'l Paper and Kodak did a lot of shutting down of excess capacity, in 1997. Therefore, they show large "extraordinary" expenses in connection with these activities. Using the Value Line data for these companies (which contains only estimates for 4Q 1997), and closing prices for Friday 2/27/98, the operating p/e's on these 3 companies are: Boeing 83.4 Kodak 19.0 Int'l Paper 46.6 Note: The example given of XYZ Corp. is highly simplified. But suppose, for example, that XYZ is in a flood zone (and therefore can't get affordable flood insurance). If so, was the loss of the factory really "nonrecurring"? Shouldn't flood risk be deducted from estimates of future earnings power? Some of these issues are further amplified in the real-life comparison of WorldCom and AT&T ("Determining the Indeterminate") at: web.idirect.com Public List As the subtitle indicates, this subject has no simple resolution. Part of the problem is that the very nature of the "extraordinary" or "nonrecurring" is that it evades easy generalization. Using cash earnings (operating cash flow minus capital spending) addresses a part, but not all, of this problem. In the XYZ example, the future expense of replacing the lost factory would show up as "capital spending" (and therefore be deducted from cash earnings) in the periods in which the money is actually spent -- rather than being "disappeared" from future net profit figures in a single fiscal quarter's "nonrecurring" expenses. Reynolds Russell web.idirect.com "There are no sure and easy paths to riches in Wall Street or anywhere else." (Benjamin Graham)

To: Berney who wrote (33)	3/5/1998 6:23:00 PM
From: Freedom Fighter	Respond to of 1722

Dow and S&P Earnings >Wayne, I would be interested in learning how you and others determine >the PE ratio for the DJIA & S&P 500. Here's my problem: I show three >stocks (BA, IP and EK) with an "NM" PE. Doesn't that make the PE >ratio for the DJIA "NM". You indicated that the current PE ratio for >the DJIA is 22X. Every time I try this exercise, I get sandbagged by >at least one >stock. I don't keep track of the either the S&P500 or DOW myself. Barron's gives the reported earnings figures each week. They sum all the losses and profits and multiply it by the DOW divisor which is calculated by DOW JONES and company for the DOW. I presume that S&P provides the S&P500 earnings which are also some sort of net of profits and losses (although I don't the formula exactly) Operating earnings are available from FIRST CALL. They are an earnings estimate company. Operating earnings exclude one time charges for restructuring etc... My personal experience during the last 10 years or so indicates that operating earnings and reported earnings in aggregate are about 10% apart on average. Each year it is different companies making the one time charges, but there are some repeat offenders. I prefer to look at reported earnings because these supposed one time charges occur every year. I do also look at operating earnings though, especially if there are accounting changes that trigger a lot of charges. In that case reported earnings would probably understate true earnings power. That was the case in the early 90's when rules for post retirement benefits were changed. Wayne