The Stock Valuation Numbers Game: How They Turn Nosebleed PE Multiples Into “Room To Run”

By Tyler Durden

The last time we looked at real, GAAP, not “pro-forma” non-GAAP EPS, in November of last year, when the S&P 500 was just over 1800, we found that on an LTM GAAP basis, the market was trading at a whopping 19x P/E LTM – a number which all but the most dyed-in-the-wool permabulls such as Janet Yellen, would call significantly overvalued (and which even JPM reported was higher than 89% of all P/E prints in the history of the market).


What happened next was remarkable: following a uniform change to pension accounting, which helped “revise” US GDP by $500 billion higher, said revision also flowed through to reported corporate earnings, not just non-GAAP EPS but also GAAP, and EPS for the S&P500 were revised retroactively higher virtually uniformly by about $1.5 per quarter. This revision is shown on the chart below.

This is notable because it means that LTM GAAP EPS for the S&P500 were pushed higher from roughly $100 to $106 as of March 31.

In other words, had it not been for the pension accounting fudge which helped raise LTM S&P 500 GAAP EPS from $100 to $106, the P/E of the S&P would be nearly 20x as of Q1. Nonetheless, even on a “revised” GAAP basis, taking full benefit of pension accounting revisions (revisions which are only possible due to the S&P500 being at record highs, something which reflexively is only possible because valuation gimmicks such as this one!) the S&P is still trading at a nosebleed 18.5x LTM P/E.

So how does GAAP EPS compare to that perpetually fudged, Non-GAAP EPS – used excuslively by overzealous management teams and sell-side analysts to “justify” quite ridiculous valuations “when one excludes one-time charges, restructuring items, and so on.” Like fore exammple Alcoa‘s perpetually recurring, “non-recurring” charges or JPM’s now constant “one-time” legal addbacks. The delta between the two is shown in the chart below:

On an LTM basis this means that the choice of GAAP or Non-GAAP for the S&P 500 is equivalent to 2 turns of LTM P/E: 16.5 vs 18.5.


Backing up one chart, observent readers will notice something peculiar: in Q1 GAAP earnings tumbled while Non-GAAP earnings maintained an exuberant upward trajectory. Sure enough, anyone curious how real, GAAP EPS performed in the just completed quarter, should look at the chart below. It shows that GAAP EPS (helped by a record amount of corporate buybacks) in the first quarter of 2014 actually dropped 2.2% from Q1 2013 even as Non-GAAP suggested a nearly 5% increase!

As noted, this is happening even as corporations bought back a record amount of their own stock in Q1, reducing the S in the EPS, and thus artificially boosting the overall EPS number. One can only imagine how much worse the decling in EPS would have been had stock repurchases slowed down:

How does one explain the dramatic surge in Non-GAAP EPS compared to GAAP? Simple: supposed “one-time” Write-offs. This is what Deutsche Bank has to say about the topic:

Common items excluded from non-GAAP EPS are goodwill impairments, restructuring charges, merger costs, gain/loss on assets sales etc., which tend to be cyclical. Hence the difference between GAAP and non-GAAP EPS is largest during recessions and ~10% ex. recessions.

It is thus not surprising that the “write-off” difference between GAAP and Non-GAAP surged in Q1 2014 to 2.9: the highest since Q4 2012 when EPS once again slumped and the Fed was brought in to launch QEternity. In fact, excluding the two quarters prior to the launch of the latest round of QE, the number of “addbacks, write-offs and restructuring charges” has never been greater since the Lehman failure.

The bottom line is that the LTM P/E for the S&P 500 is therefore one of three numbers:

  • 16.5x on a non-GAAP basis.
  • 18.5x on a revised GAAP basis, or
  • 19.5x on a pre-revision GAAP basis, when corporations do not take the “benefit” of a pension boost to EPS which is solely the result of record high stock prices courtesy of a Fed and HFT-manipulated market.

Readers can make their own choice which number to use based on their own particular bias.

As for corporate revenues and CapEx… fughetaboutit.