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What ever happened to "Trailing 12 months EPS" vs "Next Year's EPS"
Old 07-17-2005, 09:15 AM   #1
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What ever happened to "Trailing 12 months EPS" vs "Next Year's EPS"

Okay, perhaps I just haven't noticed it because I wasn't a financial rag magazine subscriber back then....but is it just me, or have all magazines and other financial sources begun the sneaky trick of using FORECASTED next year's fiscal year EPS to determine PE ratios? Or, have they always (i.e. last 10 years) done that?

Seems to me that not too long ago, people would use the trailing 12 months actual earnings to compute PE ratios and comment on whether it looks over/under valued compared to growth rates.

Also, note that trailing 12 months versus next year's earnings isn't just 1 years worth of "earnings inflation/PE Ratio deflation", it's TWO (going from trailing 12 months, skipping over current year EPS estimate, going to next year's EPS estimate).

Some might say it's just due to low inflation not creating as much worry, so we can use the liberty to stretch out from trailing 12 months to next years EPS...but has anyone else become a little 'worried' about this trend to quietly change how some people talk about PE ratios?

Or, am I just (ok, perhaps that's already a given....)

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Re: What ever happened to "Trailing 12 months EPS" vs "Next Year's EPS"
Old 07-17-2005, 11:43 AM   #2
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Re: What ever happened to "Trailing 12 months EPS" vs "Next Year's EPS"

I think that it depends on where you look. I think that s&p stock reports give both. There was an article in Better Investing (last month) that suggested that future p/e ratios were more useful. I guess that makes some sense since you are buying future earnings and making an educated guess on the future.

Look Ahead When Calculating P/E Ratios
You're Buying Future Earnings
by Kenneth S. Janke, Sr.

When people purchase a stock, they don't expect to receive the dividends that were paid in the past year. They'll get the dividends that are paid in the future as long as they remain shareowners. Then why do some investors base the price-earnings ratio on what was reported during the past fiscal year or the last 12 months?

Most NAIC members use the Value Line Investment Survey or Standard & Poor's reports to complete a stock study. Yet few seem to make an important adjustment when it comes to the P/E ratio.

Consider that the price range during 2004 was what actually happened from the first trading day of the year until the last trade in December. Yet the earnings for 2004 (Dec. 31 calendar year) weren't actually known until sometime in 2005, and that could have been any time between the middle of February and April. To take it a step further, the stock price on the first trading day of the year was at a time when the earnings per share for 2004 hadn't been reported yet.

Just as an investor doesn't receive any dividends prior to when the stock was purchased, the future price is going to be determined on earnings in the coming year and beyond. To be consistent with information you garner from the popular data services, use estimates to determine the P/E ratio. There's no question that some estimated earnings will change throughout the year. And basing the multiple on estimates predicted by analysts can result in a price downturn if there's a disappointment in some quarterly figures.

Still, as investors we're buying a company's future earnings. It means we should consider estimated earnings for the coming year.

You can use a number of sources. I have found that most BetterInvesting members look at the earnings estimates given in Value Line, but that's only one analyst's opinion. It's probably prudent to get a consensus of estimates from a number of financial analysts who follow an industry and specific companies; this is often referred to as the "analysts' consensus estimate," or ACE.

I mention consensus because estimates can vary. For example, of the 20 analysts who report and follow Exxon Mobil, the range for this year's earnings per share goes from $3.72 to $4.95, with a consensus of $4.45. The range of estimates from 19 analysts covering General Electric is narrower -- $1.80 to $1.85.

The service I find convenient is Standard & Poor's Earnings Guide. There's a cost to subscribe to the service, but your local library might have it. Each month when I receive the guide, I look for any changes in estimates for the coming year and adjust my studies to reflect them. It works for me because I like to make changes in the studies at a specific time in the month.

You can access several free sources on the Internet. Smart Money, for example, uses earnings estimates provided by Zacks Investment Research. Three others -- Yahoo! Finance, Marketwatch and CNN/Money -- employ data from Thomson Financial.

Whatever source you use, be aware that its estimates might be different from those found on other services. They're often pretty close, however. It all depends on which analysts the data providers consult to calculate their averages.

Kenneth S. Janke, Sr., is chairman of NAIC's BetterInvesting Board of Trustees and a member of BetterInvesting Magazine's Securities Review Committee.
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