Stocks Seen Unchanged; Profits Debated

yahoo.com ^ | Tue, Jul 27, 2004 | Reuters

[David]

"I don't have a real problem with your opinion, other than this statement:

At present, stocks are selling at 55-60 times earnings

I would love to see where there are a significant number of stocks that are selling this high. I am under the assumption that the average P/E is around 15-16. Even Price to Future Earnings doesn't really support your statement. Do share."

First place, what you now see in the financial media about P/E is Price/"Core Earnings". S&P has a definition of Core Earnings which is intended to be reported earnings from continuing core operations however the definition is fuzzy. Companies publish their financial statements on this basis.

So they do not reflect actual current compensation costs because they no longer accrue currently for actual retirement benefit costs and for the further reason that they do not treat actual compensation cost of stock options as current period expenses.

Many real current period costs become extraordinary items--the company hopes they will be non recurring but for GAAP purposes, they are actual incurred costs of earning reported revenues--you can't pay dividends out of amounts left before these items because you spent the money on the costs reflected.

A year ago last fall, I ordered up 10Q's on a number of companies I follow and for which I receive financial statements and I restated the financial statements based on the 10Q information because I wanted to see what reality was. At that time, reality was 54 times for all companies as a group excluding one, that one being Berkshire Hathaway.

I believe the situation has deteriorated since--many of these companies have no real earnings at all.

Your 15-16 is probably incorrect--what you are supposed to believe based on this reported core fiction is somewhere between 24 and 30 depending on whose version you see. The financial press generally has a lot of difficulty telling you about earnings that are clearly wrong with respect to retirement benefit costs and the fictions associated with Pension Plan return accounting and so you see numbers that are adjusted for some reporter's view which may or may not have anything to do with reality.

The real world may be worse than my numbers which are trailing earnings analysis. I view the next years earnings projections as not being very meaningful.