August 25, 2016

How distorted can Forward P/E multiples get?


Boeing’s (NYSE:BA) Forward P/E is 25x, not 14x;

Wallgreens Boots Alliance’s (NASDAQ:WBA) is 27x, not 17x;

Caterpillar’s (NYSE:CAT) is 37x, not 24x; and

United Continental Holdings’ (NYSE:UAL) is 25x, not 7x.

In each of the companies just mentioned, the distortions and inconsistencies in GAAP accounting are significant. The difference in P/E’s is potentially decision-changing.

Once adjusted with a consistent standardization of financial reporting rules, electives, and estimates, one sees a totally different picture of corporate performance and valuation.

Some companies have been calling out their “non-GAAP earnings.” Others have tried to focus on “core metrics.” Some investment analysts create their own types of pro-forma analysis.

Contrary to the opinion that this is just manipulation of reported results, there are very good reasons for the adjustments.

They recognize that financial reporting has devolved into an overly complex, incredibly non-transparent, inconsistent and sometimes wholly arbitrary representation of company performance and value.

The “erosion in the quality of financial statements” is severe and has been getting worse. Reliance on as-reported numbers – on earnings, assets, and debts as reported – has led to poor investment research, wasted time and resources, lost investment opportunities… and, worst of all, real investment losses.

However, we can shed light on the dark side of the financial statements by systematically and diligently adjusting the financials into a consistent, reliable set of metrics.

The differences between as-reported metrics and economic reality are significant and direction-changing.

It’s not just valuation.

Here are current examples of major differences in corporate profitability, directly from the Valens Research database of 3,000+ companies:

Deere & Company (NYSE:DE)Return on Assets is closer to 11%, not 3% as-reported.

CDW Corporation (NASDAQ:CDW) Return on Assets is 40%, not 7% as-reported.

Dover Corporation (NYSE:DOV)Return on Assets is 22%, not 7% as-reported.

Fortune Brands Home & Security (NYSE:FBHS) Return on Assets is 17%, not 8% as-reported.

These are just a few examples. However, if you’d like to see any other companies, we’re letting investors and analysts see the database, now available while in open beta. Just click HERE.

If you’re interested in learning more about the nature of all these adjustments, and just how unreliable as-reported GAAP-based metrics can be, please consider registering for this program:

The Dark Side of Financial Statements and the Impact on Equity, Credit, and Macro Investing (September 9, 2016, Friday at the Driehaus College of Commerce at DePaul University)

===> Click here for event details.

After attending this program, you’ll be able to clearly see a company’s economic reality despite GAAP inconsistencies — and make more intelligent investment decisions.

This program has been very well-received at CFA societies around the world.

This morning seminar will be held in Chicago this coming September 9.

We hope to see you there.