Rosa's CantinaThe debate on El Paso stock starts with the numbers. Based on the bottom line the company posted in its Securities and Exchange Commission filings, according to generally accepted accounting principles, El Paso earned just 18 cents a share for 2001. That means that on a GAAP basis, the stock is trading at a rather robust 98 times earnings. But few dwell on this figure, noting a host of merger-related costs and other so-called nonrecurring charges. Analysts look instead to the more generous pro forma earnings favored by the company. Last year, El Paso reported pro forma earnings of $3.31 a share.
|World of Difference |
Pro forma treatment boosts El Paso earnings
|Source: Company press releases, SEC filings.|
Weighing that and other numbers, many analysts describe El Paso as clearly undervalued, offering a mean 12-month price target of $24.53. The stock recently traded at $17.50, which is less than a third of the 52-week high. But an ambitious "Honest EPS" study recently undertaken by the Aeltus Investment Management division of ING cautions against buying stocks with wide differences between actual and reported earnings. El Paso ranks as one of the companies with the biggest discrepancies between actual GAAP earnings and the pro forma numbers that, in the wake of the collapse of Enron, WorldCom and practically the entire tech sector, are now widely discredited on the Street. "Some argue that pro forma numbers are based on the future -- which is of more concern to investors -- but the past is relevant, too," said Douglas Cote, the portfolio manager behind the study. "It's evident. This is making our clients money." Cote, who examined eight years' worth of earnings reports from 500 companies, found that investors would earn 11% more annually by purchasing companies with high "honest EPS" numbers and selling those without them.