Expected EPS × Trailing P/E
78 Pages Posted: 5 Sep 2024 Last revised: 18 Nov 2024
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Expected EPS × Trailing P/E
Expected Eps × Trailing P/E
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: Suggested Citation