Expected EPS × Trailing P/E

78 Pages Posted: 5 Sep 2024 Last revised: 18 Nov 2024

See all articles by Itzhak Ben-David

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Alex Chinco

City University of NY, Baruch College, Zicklin School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: September 01, 2024

Abstract

Sell-side analysts describe how they price their own subjective beliefs in the text of each report they write. We read 513 reports and find that most analysts do not use a discount rate. Instead, they set price targets by multiplying a company’s expected EPS (earnings per share) times its trailing P/E (price-to-earnings ratio). Trailing twelve-month P/Es account for 91% of the price-target variation in IBES. This largely backward-looking approach is problematic for the current research paradigm even if analysts are not the marginal investor.We build a simple trailing P/E model and show that it predicts market reactions to earnings surprises.

Keywords: Earnings Per Share (EPS), Price-To-Earnings Ratio (P/E), Price Target, Sell-Side Analysts, Present-Value Logic

JEL Classification: G12, G14, G32

Suggested Citation

Ben-David, Itzhak and Chinco, Alexander, Expected EPS × Trailing P/E (September 01, 2024). Fisher College of Business WP 2024-03-018, Available at SSRN: https://ssrn.com/abstract=4946881 or http://dx.doi.org/10.2139/ssrn.4946881

Itzhak Ben-David (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)

HOME PAGE: http://https://u.osu.edu/ben-david.1/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/

Alexander Chinco

City University of NY, Baruch College, Zicklin School of Business ( email )

One Bernard Baruch Way
New York, NY 10010
United States

HOME PAGE: http://www.alexchinco.com

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