Other Comprehensive Income in analysis

CFA Level I FRA
#1

An analyst is looking at two comparable companies. Company A has a lower P/E ratio than Company B, and the conclusion that has been suggested is that Company A is undervalued.

As part of examining this conclusion, the analyst decides to explore the question: What would the company’s P/E look like if total comprehensive income per share—rather than net income per share—were used as the relevant metric?

To begin with:

Company A - Price =35, EPS=1.60, P/E ratio 21.9 , OCI loss =(16.272) million , Shares= 22.6 million

For Company B in the same order as above - 30, 0.90,33.3, (1.757) ,25.1

After the inclusion of the OCI loss:

Company A OCI (loss) per share $0.72 (16.272/22.6)

Comprehensive EPS = EPS + OCI per share =$0.88 ($1.60-$0.72)

Price/Comprehensive EPS ratio 39.8 (35/0.88)

Company B OCI (loss) per share $0.07 (1.757/25.1)

Comprehensive EPS = EPS + OCI per share = $0.83 ($0.9-$0.07)

Price/Comprehensive EPS ratio 36.1 (30/0.83)

Conclusion given: Part of the explanation for Company A’s lower P/E ratio are the significant losses accounted for as other comprehensive income (OCI) and not included in the P/E ratio to begin with.

My question is, do the new Price/Comprehensive EPS ratios tell us whether company A is undervalued or not? Or is the example simply meant to show the effect OCI gains/losses can have on a P/E ratio ?

#2

In my opinion, I think the point is to show the latter. Whether or not you are deriving P/E on a basis that includes OCI or not is only as good as what you are comparing it to since P/E is a measure of “relative” value whereas doing a DCF valuation would be intrinsic.

Obviously you would NOT want to calculate P/E for a firm including OCI to the P/E of another firm in the same industry without that OCI being factored in. P/E for this reason can be a poor way to place value on firm since there are literally tons of ways to come up with “E” in the ratio.

#3

Great, thank you ! I appreciate your help.