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Through a glass clearly

October 24th, 2002

This NYT piece by Floyd Norris has been given the headline Looking Glass on Earnings Just Got Darker, but I think this is wrong, assuming “dark” is used correctly to mean obscure (it’s a slightly mangled quote from the Bible), and not to mean “dismal”.
The S&P definition of “core earnings” reported in the article is pretty much right. It
(i) expenses stock options
(ii) calculates pension costs correctly
(iii) does not allow the exclusion of ‘one-time’ charges for restructuring
(iv) allows the exclusion of charges for impairment of goodwill in acquisitions (this is correct in the case of stock-only mergers, it’s not clear whether it also applies when cash is paid).
The upshot is that core earnings give a much clearer picture of profitability than pro-forma earnings, operating earnings or Generally Accepted Accounting Practice (GAAP).
The bottom line – profits are less than half those reported by companies and the S&P 500 is currently trading at around 50 times earnings.

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