NEWSWIRE - November 9, 1998

Topic: Price/Earnings Ratio, Common Stock Valuation

Source: "Resilient Stock Market Sparks Debate on P/Es," by Greg Ip, Wall Street Journal, Monday, November 9, 1998, page C1. "Who Can You Trust?" by Sarah Bartlett, Business Week cover story, October 5, 1998.

Synopsis of Article: The Wall Street Journal article provides a good discussion of some of the difficulties of using Price/Earnings ratios to measure stock market values. With the Dow closing on Friday, November 6, 1998 at 8975.46 (at 4 percent below its record high on July 17^th) there is increased focused on P/E ratios and market valuation. Current P/E ratios range from 29 to 22 times earnings, depending on how earnings are measured. The article distinguishes between trailing versus future earnings, and discusses how analyst's optimism may bias forecasts of future earnings. The article also discusses reported earnings versus operating earnings, and presents arguments for and against using either of these measures. The Business Week article presents further discussion of the recent trend toward more aggressive accounting practices by many companies to manage their earnings, and the increasing acceptance of these practices by accountants and analysts. Given the recent quote from SEC Chairman Arthur Levitt, "I fear that we are witnessing an erosion in the quality of earnings, and therefore, the quality of financial reporting," the articles offer a good vehicle for discussing problems with accounting earnings and their relevance to common stock valuation.

Questions:

1. How do earnings impact common stock value?

2. Which is more relevant to common stock value, trailing earnings or future earnings?

3. Which are more relevant to common stock value, reported earnings or operating earnings?