Book value

All Cap & Sector Index: Price vs. Economic Book Value Looks Cheaper

tdub303/E+ via Getty Images

The trailing PEBV ratio for the NC 2000 fell from 1.7 on 6/30/21 to 1.2 on 5/16/22 and is at its second lowest level since June 30, 2016.[1],[2]

This report is an abridged version of All Cap Index & Sectors: Price to Economic Book Value looks cheaper through 5/16/22, but downside risks loom, one of our quarterly fundamental market and sector trends series.

NC 2000 rear PEBV ratio fell from 06/30/21 to 05/16/22

The rolling PEBV ratio compares the expected future earnings of the NC 2000 (as reflected in its price) to its economic book value as of 05/16/22. The NC 2000 PEBV ratio of 1.2 implies that NC 2000 earnings (NOPAT) will rise 20% between last twelve months (TTM) and 1Q22 levels.

Key details on certain CN 2000 sectors

Four NC 2000 sectors, telecom services, basic materials, financials and energy, are trading below their economic book value. The consumer staples and healthcare sectors are trading at their economic book values. The Telecommunications Services sector has the lowest PEBV ratio among the eleven sectors in the All Cap Index based on 5/16/22 prices and 1Q22 10-Qs financial data.

A PEBV ratio of 0.5 means investors expect telecom services sector earnings to fall 50% from TTM levels through 1Q22. On the other hand, investors expect the real estate and industrials sectors (PEBV ratios of 3.2 and 1.7) to improve earnings more than any other sector in the All Index. Cap.

Below, we highlight the basic materials sector.

Example of sector analysis: Base materials: trailing PEBV ratio = 0.7

Figure 1 shows that the PEBV ratio for the basic materials sector fell from 1.8 on 6/30/21 to 0.7 on 5/16/22. The market capitalization of the basic materials sector fell from $1.4 trillion on 6/30/21 to $1.2 trillion on 5/16/22, while its economic book value fell from $791 billion on 6/30/21 to $1.6 trillion as of 5/16/22.

Figure 1: PEBV ratio of basic materials: December 1998 – 05/16/22

NC 2000 Basic materials sector PEBV ratio trailing since 1998

NC 2000 PEBV ratio of the basic materials sector since 1998 (New Constructs, LLC)

Sources: New Constructs, LLC and company filings. The May 16, 2022 measurement period uses price data on that date and incorporates financial data from 1Q22 10-Qs, as this is the earliest date for which all 1Q22 10-Qs for NC 2000 constituents were available.

Figure 2 compares trends in market capitalization and economic book value for the basic materials sector since 1998. We sum the individual NC 2000/sector constituent values ​​for market capitalization and economic book value. We call this approach the “Aggregate” methodology, and it matches the S&P Global (SPGI) methodology for these calculations.

Figure 2: Commodity Materials Market Capitalization and Economic Book Value: December 1998 – 5/16/22

Market capitalization and economic book value of the basic materials sector NC 2000 since 1998

Market capitalization and economic book value of the basic materials sector NC 2000 since 1998 (New Constructs, LLC)

Sources: New Constructs, LLC and company filings. The May 16, 2022 measurement period uses price data on that date and incorporates financial data from 1Q22 10-Qs, as this is the earliest date for which all 1Q22 10-Qs for NC 2000 constituents were available.

The Aggregate methodology provides a simple view of the entire NC 2000/sector, regardless of company size or index weighting, and is the way S&P Global (SPGI) calculates metrics for the S&P500.

For additional perspective, we compare the aggregate method for the mobile PEBV ratio with two other market-weighted methodologies. Each method has its advantages and disadvantages, which are detailed in the appendix.

Figure 3 compares these three methods of calculating rolling PEBV ratios for the Basic Materials sector.

Figure 3: Methodologies of trailing PEBV ratios of base materials compared: December 1998 – 05/16/22

PEBV analysis of the NC 2000 basic materials sector since 1998

PEBV analysis of the base materials sector NC 2000 since 1998 (New Constructs, LLC)

Sources: New Constructs, LLC and company filings. The May 16, 2022 measurement period uses price data on that date and incorporates financial data from 1Q22 10-Qs, as this is the earliest date for which all 1Q22 10-Qs for NC 2000 constituents were available.

This article originally published on June 2, 2022

Disclosure: David Trainer, Kyle Guske II, 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 NC 2000/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 NC 2000/sector, regardless of company size or index weighting, and is the way 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, for example, ROIC and its drivers, but we include them here nonetheless for comparison:

  1. Market-weighted measures – calculated by weighting according to market capitalization the PEBV ratio of individual companies in relation to their sector or the overall NC 2000 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 NC 2000 or its sector
    2. We multiply the PEBV ratio of each company by its weight
    3. The rolling PEBV ratio NC 2000/Sector is equal to the sum of the rolling PEBV ratios weighted for all the companies of the NC 2000/sector
  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 NC 2000 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 NC 2000 company/sector to determine the weighted NC 2000 or sector market capitalization and the weighted economic book value.
    4. The NC 2000/sector rolling PEBV ratio is equal to the NC 2000/sector weighted market capitalization divided by the NC 2000/sector weighted economic book value

Each methodology has its pros and cons as listed below:

Aggregate method

Advantages:

  • A simple look at the whole NC 2000/sector, whatever the size or weight of the company.
  • 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:

  • Takes into account a company’s market capitalization relative to the NC 2000 sector and weights its measures accordingly.

The inconvenients:

  • Vulnerable to outlying results from a single company have a disproportionate impact on the overall PEBV ratio.

Market-weighted factor method

Advantages:

  • Considers a company’s market capitalization relative to the NC 2000 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 NC 2000 /Sector.

[1] We calculate these measures based on the S&P Global methodology, which sums the individual NC 2000 component values ​​for market capitalization and economic book value before using them to calculate the measures. This is what we call the “Aggregate” methodology.

[2] Our research is based on the latest audited financial data, which is 1Q22 10-Q in most cases. Price data is as of 05/16/22.