Forward P/E Distortions: The Case of Atheros Communications

Feb. 9.07 | About: Atheros Communications, (ATHR)

Many investors have noticed that the markets tend to rise more often than not during the first quarter of the calendar year. A contributing factor is the way information is disseminated.

Take Yahoo! Finance and Atheros Communications Inc. (NASDAQ:ATHR) as an example. The current quarter ends in March 2007. Trailing twelve months PE conventional refers to the last reported period, going back 12 months. This is the earnings for 2006. Forward PE conventionally refers to the following 12 months. This is the earnings for 2007.

Many computer programs have a ‘bug’ in them. Essentially because we are now in 2007, the programs erroneously take 2008 as the following 12 months. For some reason once the first quarter of 2007 is reported the programs correct themselves and calculate forward PE on a quarterly basis meaning Q2 2007 through Q1 2008.

Now take a look at the Yahoo! Finance figures here and here.

You will notice the following;

1) Current year average estimates (2007) are at 0.96. This is what ‘Forward PE’ should be calculated on.
2) Next year EPS is 1.16. 2008 is not a true basis for forward PE as 24 months out is inherently unreliable.
3) Under the “Delayed quote data” heading you have ttm EPS listed as 0.34 and a ttm PE of 75.95. On the second page under the “Earnings History” you have an “EPS Actual” figure that adds up to 0.72 for the trailing twelve months. The latter is incorrect.
4) Yahoo! Finance lists the Forward P/E (1yr) as 22.33! This is incorrect. As mentioned above, the computer program has taken the closing price of 25.90 and divided by the 2008 figure of 1.16 resulting in 22.33. The correct calculation should be; 25.90 divided by 0.96 = 26.98.
5) We have pointed out in the past (see all comments here and here) that our colleagues constantly forget to reduce charges from ATHR EPS figures. Our 2007 estimates are for 1.02 less 0.22 for option charges, resulting in net GAAP earnings of 0.80 per share for 2007. Since we hit the nail on the head for 2006 estimates we suggest using the following formula; 25.90 divided by 0.80 = 32.38. Using our colleagues’ figures and deducting charges, estimated earnings are less resulting in even higher forward PE.

Be careful and do your own calculations for forward PE during the first quarter of every calendar year. There is a major difference between a forward PE of 22 and 32.

In the example given above, at 22 the stock looks cheap. At 32 ATHR is expensive. ATHR should be trading at a forward PE range of 26 to 30, depending on how bullish you are. We are very bullish on this stock, but use the correct figures in our calculations.

ATHR 1-yr chart:

ATHR 1-yr chart