Corporate Earnings Hijinks Are Alive And Well!
-- July 16, 2003
You might think that the flack corporate America has endured because of its accounting hijinks would make it a little gun shy. Nothing could be further from the truth!
In fact, according to The New York Times, the quality of earnings among America's biggest companies -- members of the S&P; 500 -- is downright abysmal ...
Companies are STILL booking operational costs as special charges. They're STILL failing to subtract the cost of stock options. And they're STILL making wildly optimistic assumptions about pension earnings.
Recalculate earnings after adjusting for these hijinks and the adjusted bottom-line results are astounding. For example, in 1991, earnings for S&P; 500 companies would have been roughly 18% less than what they reported to investors. That was bad enough.
But now, fast forward to 2002: Earnings for S&P; 500 companies -- after adjusting for the hijinks -- were an astonishing 41% less than what was reported to investors.
If you had bought the average stock in the S&P; 500 index last year, assuming the company statements were accurate, you might THINK you paid roughly 19 times earnings. But once you adjust for the bad stuff left out of the statements, you discover that you ACTUALLY paid 25 times earnings! That's like buying a "pound" of beef that weighs only 12 ounces.
This is not just 20-20 hindsight. Looking ahead, it gets worse: The average S&P; 500 stock is now trading at THIRTY-THREE times earnings -- more overvalued than when the index hit its record high of 1552.87 on March 24, 2000. And that's based on the questionable reported earnings.
If you consider that actual earnings are estimated to be as much as 41% lower, then the average S&P; 500 stock is now really trading at an insane 56 times earnings!
Now that's a bubble that's ready to burst!
related article: Earnings Are Worse Without the Icing