Book value

All Cap & Sector Index: Price vs. Economic Book Value through 3/11/22

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This report[1],[2] is an abridged version of All Cap Index & Sectors: Price to Economic Book Value Through 3/11/22, one of our quarterly series on fundamental market and sector trends.

NC 2000 trailing PEBV The ratio fell from 03/31/21 to 03/31/22

The rear PEBV ratio for the NC 2000 decreased from 1.7 at 3/31/21 to 1.3 at 3/31/22. This rolling PEBV ratio compares the expected future earnings of the NC 2000 (as reflected in its price) to its book economic value as of 03/11/22. At 1.3, the NC 2000 valuation implies that earnings from NC 2000 stocks will rise 30% from 2021 levels.

Key details on certain CN 2000 sectors

Four NC 2000 sectors, telecommunications services, financials, basic materials and consumer staples, are trading below their economic book value. The telecommunications services sector has the lowest PEBV ratio among the eleven sectors in the all-cap index based on 3/11/22 prices and 2021 10-K financials.

A PEBV ratio of 0.5 means that investors expect earnings in the telecommunications services sector to decline by 50% from 2021 levels. On the other hand, investors expect that the real estate sector (PEBV ratio of 3.4) improves its earnings more than any other sector in the All Cap index.

Below, we highlight the basic materials sector.

Example of sector analysis: Base materials : Trailing PEBV ratio = 0.8

Figure 1 shows that the rolling PEBV ratio for the basic materials sector fell from 1.8 on 3/31/21 to 0.8 on 3/11/22. The market capitalization of the basic materials sector fell from $1,210 billion on 03/31/21 to $1,230 billion on 03/11/22, while its economic book value fell from $683 billion on 3/31/21 to $1.5 trillion as of 11/3/22.

Figure 1: PEBV ratio of basic materials: December 1998 – 03/11/22

NC 2000 Basic materials sector Trailing PEBV ratio

NC 2000 Basic materials sector Trailing PEBV ratio (New Constructions, LLC)

The March 11, 2022 measurement period uses price data on that date and incorporates financial data from 10-K 2021, as this is the earliest date for which all 10-K 2021 for NC constituents 2000 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: Market capitalization and economic book value of basic materials: December 1998 – 3/11/22

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

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

The March 11, 2022 measurement period uses price data on that date and incorporates financial data from 10-K 2021, as this is the earliest date for which all 10-K 2021 for NC constituents 2000 were available.

The Aggregate methodology provides a simple overview of the entire NC 2000/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. 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 – 03/11/22

PEBV analysis of the basic materials sector NC 2000

PEBV analysis of the basic materials sector NC 2000 (New Constructions, LLC)

The March 11, 2022 measurement period uses price data on that date and incorporates financial data from 10-K 2021, as this is the earliest date for which all 10-K 2021 for NC constituents 2000 were available.

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 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 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 direct look at the entire 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. We call this the “Aggregate” methodology.

[2] Our research is based on the latest audited financial data, which is 10-K 2021 in most cases. Price data is as of 3/11/22.