Book value

Price at economic book value increased until 8/12/22

The leak ratio (PEBV) of the NC 2000 decreased from 1.2 on 6/30/22 to 1.4 on 8/12/22. The NC 2000 consists of the 2000 largest US companies by market capitalization in my company coverage. The components are updated at the end of the quarter. I exclude companies reporting under IFRS and non-US ADR companies.

This report is an abridged version of All Cap Index & Sectors: Price to Economic Book Value Rose Through 8/12/22, one of my quarterly reports on fundamental market and sector trends. I calculate these metrics based on the S&P Global (SPGI) methodology, which sums the individual NC 2000 constituent values ​​for market capitalization and economic book value before using them to calculate the metrics. This is what I call the “aggregate” methodology.

Based on the latest audited financial data available, which is 2Q22 10-Q in most cases. Price data is as of 8/12/22. See the appendices for more information on calculation methodologies.

NC 2000 rear PEBV ratio changed from 06/30/22 to 08/12/22

The rolling PEBV ratio compares the expected future earnings of the NC 2000 (as reflected in its price) to its book economic value as of 12/8/22. The NC 2000 PEBV ratio of 1.4 implies that NC 2000 earnings (NOPAT) will increase by 40% between last twelve months (TTM) and 2Q22 levels.

Key details on certain CN 2000 sectors

Three NC 2000 sectors, telecom services, energy and basic materials, are trading below their economic book value. The financial services sector trades at its economic book value. Figure 2 shows that the telecommunications services sector has the lowest PEBV ratio and the real estate sector has the highest PEBV ratio among the eleven sectors of the all-cap index on a price basis at 8/ 12/22 and financial data from 2Q22 10- Qs.

A PEBV ratio of 0.6 means investors expect telecom services sector earnings to fall 40% from TTM levels in 2Q22. On the other hand, investors expect the real estate and consumer discretionary sectors (trailing PEBV ratios of 3.8 and 2.1) to improve earnings more than any other sector in the index. All Cap.

Below, I highlight the telecommunications services sector, which had the lowest PEBV ratio until 8/12/22.

Example of sector analysis: telecommunications services: downstream PEBV ratio = 0.6

Figure 1 shows that the mobile PEBV ratio for the telecommunications services sector fell from 0.5 on 6/30/22 to 0.6 on 8/12/22. The market capitalization of the telecommunications services sector fell from $658 billion as of 6/30/22 to $628 billion as of 8/12/22, while its economic book value fell from $1.2 trillion as of 6/30/22 to $1.1 trillion as of 12/8/22.

Figure 1: PEBV ratio of telecommunications services: December 1998 – 8/12/22

The August 12, 2022 measurement period uses price data as of that date and incorporates 2Q22 10-Q financial data, as this is the earliest date for which all 2Q22 10-Qs for NC 2000 constituents were available.

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

Figure 2: Market capitalization of telecommunications services and economic book value: December 1998 – 8/12/22

The August 12, 2022 measurement period uses price data as of that date and incorporates 2Q22 10-Q financial data, as this is the earliest date for which all 2Q22 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, I compare the aggregate method for the trailing 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 telecommunications services sector.

Figure 3: Comparison of PEBV ratio methodologies for telecommunications services: December 1998 – 08/12/22

The August 12, 2022 measurement period uses price data as of that date and incorporates 2Q22 10-Q financial data, as this is the earliest date for which all 2Q22 10-Qs for NC 2000 constituents were available.

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

Appendix: Trailing PEBV Ratio Analysis with Different Weighting Methodologies

I derive the above metrics by adding the individual constituent NC 2000/sector values ​​for market capitalization and economic book value to calculate the trailing PEBV ratio. I call this approach the “Aggregate” methodology.

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, I compare the aggregate method for the trailing PEBV ratio with two other market-weighted methodologies. These market-weighted methodologies add more value for ratios that don’t include market values, e.g. ROIC and its drivers, but I’m including them here nonetheless, for comparison:

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. I 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

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. I multiply the market capitalization and the economic book value of each company by its weight
  3. I sum the weighted market capitalization and the weighted economic book value of each company in the NC 2000/each sector to determine the weighted market capitalization of the NC 2000 or the sector 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.