Plan B Forum

Here because I did not see where it fits any place else.

Where do the general stock information services get their information? In particular, the data that becomes the P/E or Price-Earnings ratio.

The particular quandary is the Caterpillar company. Every iPhone comes with an 'ap' called Stocks and the icon is a black square with a line graph running across it. For the last several weeks it has reported the P/E for CAT as above 600. I could not see any reason for it to be so high. On my home computer I use Yahoo and it has a Finance service that reports the Cat P/E as minus 400+ during the same period. A P/E in this range is typically some high flyer that is pushed by lots of speculation on a big success in the future while it so far is not making much money at all, like Tesla cars. So last nite I called my brother-in-law who is retired from Cat, lives in Peoria (home of Cat) and has done a lot of trading. He had no explanation either. He uses e-Trade which he said listed the P/E in the 600's Looking at the other financials, such as stock price and earnings history, debt burden, inventories, there seemed to be no basis for a P/E way up in the speculative stratosphere.

This morning I went to the local public library and lookedup Cat in Value Line, the gold standard for conservative stock information. As of 18 August 17, it lists the P/E as 21.7 which looks to me to be very reasonable.

Any ideas what is going on with a source like e-Trade? Is Value Line way off base?

snailgate.

BUY LOW AND SELL HIGH

According to the info on the Caterpillar investors' page earnings for FY 2016 were negative $0.11 per share. With shares trading today at $113 (same source) the PE ratio is -133/0.11= 1210. For FY 2017 to date reporting through Q1 and Q2 the profit is $1.67. I don't see a forecast for the year; but assuming (a bad assumption) that Q3 and Q4 will follow the first half of the year, FY 2017 will be $3.34. So PE ratio for 2017 will be 133/3.34 = 39.8.

There are variations on PE ratio which include sometimes one factor, sometimes another. Interpreting these numbers is something else; and of course the PE ratio of a company like Tesla will be absurd because of high expectations for what it will do in the future.

I always thought that if earnings were negative, there was no P/E ratio, ditto for zero (otherwise P/E would be infinite).

I note that this number is reported as P/E (TTM) which means some kind of rolling average over the Trailing Twelve Months. and those are the high number, in the hundreds. But WHY this statistic for Cat, and the more normal 'plain vanilla' P/E for most other companies? The price for CAT dropped about a dollar (114 to 113) yesterday and this P/E (TTM) jumped up another hundred. Plus this P/E (TTM) varies enormously on different reports.

snailgate.

The financial data can only come from the quarterly and annual corporate filings of the company. BUT it looks like there were substantial unusual charges in 2016, to give effect to changes in accounting policy and recognize goodwill impairment, restructuring costs and deferred tax adjustments, none of which are particularly indicative of future profit potential. CAT has calculated an adjusted profit per share of $3.42 for 2016 and has recast the effect of these charges on the PPS of the prior years affected. It would appear that some analysts are using the adjusted and recast PPS to calculate P/E. Stock price on Dec 31 was $93, so it has moved A LOT since then. If the analysts were using stock price as at the date of their analysis, then that could explain the variation in P/E based on a PPS of -$0.11. Or perhaps some came up with a different adjusted PPS than CAT by selecting different types/amounts of charges to adjust for.

The very high ratios I saw were based on either the unadjusted PPS of -$0.11 for 2016 or a TTM PPS of $0.15, presumably from early in 2017. It would seem that some analysts have not moved away from using "PPS before extraordinary items", even though the definition of extraordinary items has narrowed considerably over time.

Not sure if this helps - I know something about the accounting concepts underpinning these ratios, but nothing at all about how analysts apply them to their calculations.

Thanks Scooter. I know practically nothing about the accounting rules for this stuff. I have my own uninformed point of view. I want a P/E less than 25, but the current number for Ford motor is so low it is scary (for me) I note your location. I (perhaps unfairly, but there it is) regard a company that is only listed on the Toronto Exchange as probably run by con artists, and judge the same about a business incorporated in Las Vegas.

snailgate