The Dow Jones Industrial Average’s push to record highs has brought out all kinds of comparisons between the current Dow Jones components and those in the Dow in October 2007. I tend to think a lot of these comparisons are misleading. One of those is the comparison of the P/E.
The following data on the Dow Jones is based on operating earnings and has been adjusted for stock splits and component changes; this is an apple to apple comparison on how the current components were performing in 2007.
All the current Dow Jones components were also S&P500 constituents at the time so I used the price data I had downloaded for the S&P 500 on Oct. 12, 2007 which was the nearest data I had to the record close of Oct 9, 2007 and the intraday record high seen on Oct 10, 2007. I used the individual company earnings data for the third quarter of 2007 which is from data I have compiled on the S&P500 over the years. The Dow Jones is evenly weighted, so the P/E’s contained are directly comparable to the index’s P/E, both then and now.
From this data I found that on Oct. 12, 2007 today’s Dow Components had a P/E of 15.86 based on operating earnings of the then record trailing twelve months earnings of the third quarter of 2007 (although most of these earnings had not yet been reported at that time). The P/E was a little high based on historical averages, which average between 15 and 15.8. The differences in the average P/E are discussed in more detail in the Look at Historical Average P/E Ratios article.
The components at the time had a P/E a little over 16, based on those reported in various articles I read during the past week, so there was not much variance in these numbers, even though these P/E’s were likely from “as reported” earnings and not operating earnings. The data of the S&P 500 I have from that time shows the index had operating and as reported earnings that were quite close at the time, although I do not have data of the individual as report earnings of the constituents close to the record data. There is normally not much difference in these earnings unless companies are claiming a bunch of one time charges.
The Dow Jones finished Friday with a trailing twelve month P/E of 13.70 based on current operating earnings. That makes the March 8, 2013 operating earnings P/E of the current components about 15.79% lower than it was three days after the Dow closed at an all-time high on Oct 9, 2007.
The Dow Jones components have a current fiscal year forward P/E of 12.66 and a P/E of 11.62 on next year’s fiscal earnings. Based on these apples to apples comparisons, it would appear the Dow could move substantially higher before it reaches levels that compare to the P/E seen in 2007.
These numbers are much lower than the Dow’s current P/E I’d seen published in several articles in the past week, and the 15.76 reported for March 8, 2013 in the Wall Street Journal. The major differences are these articles used GAAP earnings (I like to call them Genuinely Asinine Accounting Practices) AKA “as reported” earnings.
As reported earnings include paper losses, like the billions of dollars in the write-offs that Hewlett-Package (HPQ) took over the past year, saying the companies they bought earlier weren’t worth what they paid for them. Paper losses tend to make GAAP earnings look way lower than they really are, and as a result balloon the P/E.
I believe it was worth way more to Hewlett-Package than what they paid for these businesses just to eliminate them as competition, even if they had no intension of doing anything else with them after they bought them. Except maybe to eventually claim them as tax write-offs and shave billions off their tax bill.
These losses should be reported, but I do not believe they should be considered when determining earnings so I lean towards operating earnings for my investments. Of course if there are large differences in these earnings, it is always a good idea to see why.
The twelve month forward P/E published on the WSJ is 12.69, which is nearly identical to the full year forward operating earnings P/E of 12.66. This is not a direct comparison, however 24 of the 30 DJIA components completed their fiscal year in December, so the current fiscal year and twelve month forward earnings have earnings estimates and timespans that are very close.
What I find interesting about the current Dow components is that although the third quarter of 2007 earnings were a record trailing twelve month earnings at the time, their earnings did not peak until the second quarter of 2008. The current components posted both record quarterly earnings and record TTM earnings then, 6.90% and 4.86% above the quarterly and TTM earnings of the third quarter of 2007 respectively.
Many of these sources of information were used in this article.
Have a great day trading,
Disclosure: I currently have investments in HPQ. I am currently about 89% invested long in stocks in my trading accounts.
This article is intended to provoke thought about investment possibilities. Acting on the information provided is at your own risk. You are urged to do your own research, and where appropriate, seek professional investment advice before acting on any information contained in these articles.