Book value

2 S&P 500 sectors trade below economic book value after Q2 2021 results

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This report is an abbreviated version of S&P 500 & Sectors: Price-to-Economic Book Value Through Q2’21, one of the reports in our quarterly series on fundamental market and sector trends.

The full version of this report analyzes[1] market capitalization, economic book value, and price-to-economic book value (PEBV) ratio for the S&P 500 and each of its sectors. Our research is based on the latest audited financial data, which is Q2’21 10-Q for most companies. Price data is as of 8/18/21.

The S&P 500’s trailing PEBV ratio rose year-over-year

The PEBV ratio for the S&P 500 fell from 1.4 in Q2’20 to 1.5 on 8/18/21, the first date that all S&P 500 companies provided quarterly data for Q2’21. The S&P 500 trailing PEBV ratio hovered around this level for much of 2017-2019, before falling drastically in early 2020. This trailing PEBV ratio compares the expected future earnings of the S&P 500 (incorporated into its valuation shares) to TTM earnings in Q2’21. At 1.5, the S&P 500 valuation implies that S&P 500 earnings (NOPAT) will rise 50% from Q2’21 levels.

Key details on selected S&P 500 sectors

Two S&P 500 sectors, telecommunications services and consumer staples, are trading below their economic book value. The telecommunications services sector has the lowest PEBV ratio among the 11 S&P 500 sectors based on 8/18/21 prices and Q2’21 10-Qs financial data.

A PEBV ratio of 0.5 means the market expects Q2’21 telecom services sector earnings to decline 50% from current levels. On the other hand, investors expect the energy and real estate sectors (PEBV ratios of 17.6 and 3.6) to improve earnings more than any other sector in the S&P 500. Ci Below, we highlight the telecommunications services sector, which has the lowest PEBV ratio of the S&P 500 sectors.

Example of sector analysis[2]: Telecom services : Trailing PEBV ratio = 0.5

Figure 1 shows that the mobile PEBV ratio for the telecommunications services sector fell from 0.8 in Q2’20 to 0.5 in Q2’21. The market capitalization of the telecommunications services sector fell from $730 billion in Q2’20 to $760 billion in Q2’21, while its economic book value fell from $957 billion in Q2’20 to 1, $4 trillion in Q2’21.

Figure 1: PEBV ratio of telecommunications services: December 2004 – 08/18/21PEBV ratio of telecommunications services: December 2004 – 08/18/21

Sources: New Constructs, LLC and company filings. The August 18, 2021 measurement period uses price data as of that date and incorporates Q2’21 10-Q financial data, as this is the earliest date for which all Q2’21 10-Qs for S&P 500 components were available.

Figure 2 compares market capitalization and economic book value trends for the telecommunications services sector since 2004. We sum the individual S&P 500/sector values ​​for market capitalization and economic book value. We call this approach the “Aggregate” methodology, and it matches S&P Global’s methodology for these calculations.

Figure 2: Market capitalization of telecommunications services and economic book value: December 2004 – 8/18/21Market Capitalization and Economic Book Value of Telecommunications Services: December 2004 – 8/18/21

Sources: New Constructs, LLC and company filings. The August 18, 2021 measurement period uses price data as of that date and incorporates Q2’21 10-Q financial data, as this is the earliest date for which all Q2’21 10-Qs for S&P 500 components were available.

The Aggregate methodology provides a simple overview of the entire S&P 500/sector, regardless of company size or index weighting, and is how S&P Global calculates metrics for the S&P 500.

For additional perspective, we compare the aggregate method for the rolling PEBV ratio with two other market-weighted methodologies: market-weighted measures and market-weighted drivers. These market-weighted methodologies add more value to ratios that do not include market values, for example ROIC and its drivers, but we nevertheless include them here for comparison purposes. Each method has its advantages and disadvantages, which are detailed in the appendix.

Figure 3 compares these three methods of calculating the rolling PEBV ratio of the telecommunications services sector.

Figure 3: Comparison of PEBV ratio methodologies for telecommunications services: December 2004 – 08/18/21Comparison of PEBV ratio methodologies for telecommunications services: December 2004 - 08/18/21

Sources: New Constructs, LLC and company filings. The August 18, 2021 measurement period uses price data as of that date and incorporates Q2’21 10-Q financial data, as this is the earliest date for which all Q2’21 10-Qs for S&P 500 components were available.

This article was originally published on August 27, 2021.

Disclosure: David Trainer, Kyle Guske II, Alex Sword, and Matt Shuler receive no compensation for writing about a specific stock, style, or theme.

Appendix: Trailing PEBV Ratio Analysis with Different Weighting Methodologies

We derive the above measures by summing the individual S&P 500/sector constituent values ​​for market capitalization and economic book value to calculate the PEBV ratio. We call this approach the “Aggregate” methodology.

The Aggregate methodology provides a simple overview of the entire S&P 500/sector, regardless of company size or index weighting, and is how S&P Global calculates metrics for the S&P 500.

For additional perspective, we compare the aggregate method for the mobile PEBV ratio with two other market-weighted methodologies. These market-weighted methodologies add more value to ratios that do not include market values, e.g. ROIC and its drivers, but we nevertheless include them here for comparison:

  1. Market-weighted measures – calculated by weighting according to market capitalization the PEBV ratio of individual companies relative to their sector or to the entire S&P 500 at each period. Details:
    1. The weight of the company is equal to the market capitalization of the company divided by the market capitalization of the S&P 500 or its sector.
    2. We multiply the PEBV ratio of each company by its weight.
    3. The S&P 500/sector trailing PEBV is equal to the sum of the weighted trailing PEBV ratios for all S&P 500/sector companies.
  2. Market-weighted drivers – calculated by weighting the market capitalization and the economic book value of individual companies in each sector at each period. Details:
    1. The weight of the company is equal to the market capitalization of the company divided by the market capitalization of the S&P 500 or its sector.
    2. We multiply the market cap and economic book value of each company by its weight.
    3. We add the weighted market capitalization and the weighted economic book value of each S&P 500 company/sector to determine the S&P 500 or sector weighted FCF and weighted enterprise value.
    4. The S&P 500/sector PEBV ratio is equal to the S&P 500/sector weighted market capitalization divided by the S&P 500/sector weighted economic book value.

Each methodology has its pros and cons as listed below:

Aggregate method

Advantages:

  • Direct insight into the entire S&P 500/sector, regardless of company size or index weighting.
  • Corresponds to how S&P Global calculates metrics for the S&P 500.

The inconvenients:

  • Vulnerable to the impact of companies entering/leaving the corporate group, which could unduly affect overall values. Also sensitive to outliers over a period of time.

Market-weighted measures method

Advantages:

  • Considers a company’s market capitalization relative to the S&P 500/sector and weights its metrics accordingly.

The inconvenients:

  • Vulnerable to outlying results from a single company have a disproportionate impact on the overall PEBV ratio, as we will show below.

Market-weighted factor method

Advantages:

  • Considers a company’s market capitalization relative to the S&P 500/sector and weights its size and economic book value accordingly.
  • Mitigates the disproportionate impact of a company’s outlying results on overall results.

The inconvenients:

  • More sensitive to large swings in market capitalization or economic book value (which can be affected by changes in WACC) from period to period, especially from companies with a large weighting in the S&P 500 /Sector.

[1] We calculate these measures based on the S&P Global methodology, which sums individual S&P 500 values ​​for market capitalization and economic book value before using them to calculate the measures. We call this the “Aggregate” methodology. Get more details in Annexes I and II.

[2] The full version of this report provides analysis for each sector, like what we show for this sector.