Adjusting EPS for Nonrecurring Items.
You are calculating a trailing PIE for American Electric Power (NYSE: AEP) as of 9 November 2001, when the share price closed at $44.50. In its fiscal year ended 31 December 2000, AEP recorded EPS of $0.83 that included an extraordinary loss of $0.1 1. Additionally, AEP took an expense of $203 million for merger costs during that calendar year, which are not expected to recur, and had unusual deficits in two out of four quarters. As of November 2001, the trailing twelve months’ EPS was $2.16, including three quarters in 2001 and one quarter in 2000. The fourth quarter of calendar year 2000 had $0.69 per share in nonrecurring expenses. Without making an adjustment for nonrecurring items, the trailing PIE was $44.50/$2.16 = 20.6. Adjusting for these items, you arrive at a figure for trailing EPS of $2.85 using an underlying earnings concept, and a trailing PIE of $44.501$2.85 = 15.6. This number is the PIE an analyst would use in valuation, being consistent in the treatment of earnings for all stocks under review. In the course of this chapter, we will illustrate adjustments to earnings in many examples.