Forward Looking Earnings on the PERT

Selecting the right earnings

PERT has two parts

Factual

Forward

Looking

Estimated EPS

Estimated EPS is crucial to having a useful PERT.

The default number is the last four quarters of real earnings multiplied by your projected growth rate.

But is this the best number to use?

Last 4 quarters eps

Growth rate

Example – Johnson & Johnson

8%

.97 + .67 + .78 + .82 = 3.24

3.24 x 1.08 = 3.499

Estimated EPS for the next 4 quarters = $3.50

PERT Forward looking section is only as

good as the estimated Earnings Per Share.

The SSG does not take into account things that have happened recently that could affect future earnings.•Changes in the economy (cyclical)

•Changes in the company

•ADRs that only report earnings once a year Your projections are for five years, the

PERT is looking at next year.

Forward Looking EPS

Check your estimated EPS with the analysts.

The analysts’ next four quarters projections are usually fairly accurate.

Wall Street does not like surprises.•Companies will give a warning if they

anticipate lower earnings.

http://online.barrons.com

On the left side

Under Free Market Tools

Select Stock & Fund listings

http://online.barrons.com

Select the correct stock exchange and then select the first letter of the company name.

http://online.barrons.com

For ACS, Barron’s estimates $3.41 for the next four quarters.

Comparing EPS Projections

If the two projections are about the same keep yours.

If your projection is more than fifteen or twenty cents higher, switch to the Barron’s number.

If your projection is lower, use your judgment.

EPS Projections

Changing the Projected EPS

You may not want to change your five year projection on the front of the SSG.

Adjusting the short term next year’s projection is an option.

PERT

Select Preferences in the Options Tab

Check the Enable Advanced PERT Estimates

PERT

Under Options select

Enter Estimated EPS.

Then Select Company

Select User

Type in User Estimated EPS

What Changes with New Earnings

Current P/E (which is forward looking) increases.

Relative Value increases. P/E as a % of Growth Rate increases. Projected high price decreases.

U/S D/S Ratio decreases. Compounded Rate of Return decreases

Analysts Estimates in Software

The analyst estimates that Toolkit imports into your software represent the average annual growth rate expected for earnings for the next five years.

Do not use that number. Either use your own five year projection or a one year analysts projection

Conclusion The PERT is an important portfolio

management tool. PERT uses a one year forward

looking earnings estimate for the numbers on the right hand side.

You want this number to accurately reflect the best estimate.

Deciding what is the best estimate requires some judgment.