Converting EPS to Adj EPS

Saul,

I would like to get better at converting EPS to Adj EPS. I have several companies that don’t report Adj EPS and I always feel that I don’t have as good a handle on the value for them as I do for my stocks that report Adj earnings. There is stock based compensation but then there are other profits and expenses that need to be adjusted. For instance, if a company sells a building for a gain then that gain which contributed to earnings (but it is not relevant to the future operating income) should be backed out. Similarly, if a company such as INVN has a one time $15M legal expense then that should be added back.

For US, you suggested adding back 65% of the share based compensation. Why did you choose 65% of the expense? How did you come up with that number (maybe something with their tax rate?)? Would that 65% hold for all the past quarters (I would need to go back and make adjustments for at least the past 4 quarters to can an accurate P/E based on adj EPS)? .
Then what other items would I make adjustments to?

Now regarding UA, I’ve been thinking of selling my remaining shares for a while. Tax considerations have been one reason I’ve not pulled the trigger. Also, not having an accurate adj EPS number has held me back too.

Chris

Chris, I agree. I also take out one time expenses such as selling a building, or a one time legal expense, or a one time tax benefit, etc. I took 65% because that is assuming a 35% tax rate which is pretty normal for fully taxed (and I didn’t bother to go back through and get their actual tax rate). It is harder if they don’t give adjusted earnings, and it makes me wonder why they don’t. By the way, if you add back their tax based compensation for the year, I think you still get a trailing PE of 70 or so (down from 90, but still really high).

Saul

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Now regarding UA, I’ve been thinking of selling my remaining shares for a while. Tax considerations have been one reason I’ve not pulled the trigger. Also, not having an accurate adj EPS number has held me back too.

Chris

Gaucho,

You don’t think UA has a long runway?
Mykie

You don’t think UA has a long runway?

I think they have a lot of sales growth ahead. I think I might be able to make an average of 9-10% per year on the stock over 10 years starting from today’s stock price. I’d like to do better than that. I also think the stock is overvalued. I haven’t sold yet, but may do so when I see something else that I like better.

Chris

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