Book value

The price-to-economic book value ratio remains stable in 2Q22

The trailing PEBV ratio for the S&P 500 as of 8/12/22 is largely unchanged from 9/30/21.

This report is an abbreviated version of S&P 500 & Sectors: Price-to-Economic Book Value Holds Steady in 2Q22, one of the quarterly series on fundamental market and sector trends. The analysis in this report is based on the latest audited financial data available, or 1Q22 10-Qs in most cases. Price data for the current period as of 05/16/22.

I calculate these metrics based on the S&P Global (SPGI) methodology, which sums the individual S&P 500 constituent values ​​for market capitalization and economic book value before using them to calculate the metrics. This is what I call the “aggregate” methodology. Get more details in Annexes I and II.

The S&P 500 trailing PEBV ratio is near year-ago levels

The rolling PEBV ratio compares the expected future earnings of the S&P 500 (as reflected in its price) to its economic book value as of 12/8/22. The S&P 500 PEBV ratio of 1.4 implies that S&P 500 earnings (NOPAT) will rise 40% between last twelve months (TTM) and 2Q22 levels.

Key details on selected S&P 500 sectors

Three sectors of the S&P 500, telecommunications services, energy and basic materials, are trading below their economic book value. The financial and healthcare sectors trade at their economic book value. Figure 2 shows that the telecommunications services sector has the lowest PEBV ratio among the eleven S&P 500 sectors based on 8/12/22 prices and 2Q22 10-Qs financial data.

The telecom services sector had the lowest PEBV ratio in 2Q22, at 0.6. A PEBV ratio of 0.6 means the market expects telecom services sector earnings to decline 40% from the 2Q22 TTM level. On the other hand, investors expect the real estate and consumer discretionary sectors (PEBV ratios of 4.4 and 2.5) to improve earnings more than any other sector in the S&P 500.

Below, I highlight the telecommunications services sector.

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 09/30/21 to 0.6 on 08/12/22. The market capitalization of the telecommunications services sector fell from $723 billion on 09/30/21 to $592 billion on 08/12/22, while its economic book value fell from $1.4 trillion on 30/09/2019. /09/21 to $1.1 trillion as of 8/12/22.

Figure 1: PEBV ratio of telecommunications services: December 2004 – 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 calendar 2Q22 10-Qs for components of the S&P 500 were available.

Figure 2 compares trends in market capitalization and economic book value for the telecommunications services sector since 2004. I summarize the individual S&P 500/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 2004 – 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 calendar 2Q22 10-Qs for components of the S&P 500 were available.

The Aggregate Methodology provides a simple view of the entire S&P 500/sector, regardless of company size or index weighting, and is how 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: market-weighted measures and market-weighted drivers. 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 – 08/12/22

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 calendar 2Q22 10-Qs for components of the S&P 500 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 S&P 500/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 S&P 500/sector, regardless of company size or index weighting, and is how 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 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. I 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 companies/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 S&P 500 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 S&P 500 company/each sector to determine the weighted FCF of the S&P 500 or the sector and the weighted company value
  4. The rolling PEBV ratio of the S&P 500/sector is equal to the weighted market capitalization of the S&P 500/sector divided by the weighted economic book value of the S&P 500/sector

Each methodology has its pros and cons as listed below:

Aggregate method

Advantages:

  • A direct view of the entire S&P 500/sector, regardless of company size or 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 I 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.