Price To Economic Book Value Rose Through 8/12/22

The trailing (PEBV) ratio for the NC 2000 rose from 1.2 as of 6/30/22 to 1.4 as of 8/12/22. The NC 2000 consists of the largest 2000 U.S. companies by market cap in my firm’s coverage. Constituents are updated on an end-of-quarter basis. I exclude companies that report under IFRS and non-U.S. 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 S&P Global’s (SPGI) methodology, which sums individual NC 2000 constituent values for market cap and economic book value before using them to calculate the metrics. I call this the “Aggregate” methodology.

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

NC 2000 Trailing PEBV Ratio Rose from 6/30/22 to 8/12/22

The trailing PEBV ratio compares the NC 2000’s expected future profits (as reflected in its price) to its economic book value as of 8/12/22. The NC 2000’s PEBV ratio of 1.4 implies the profits (NOPAT) of the NC 2000 will increase 40% from trailing-twelve-month (TTM) through 2Q22 levels.

Key Details on Select NC 2000 Sectors

Three NC 2000 sectors, Telecom Services, Energy, and Basic Materials trade below their economic book value. The Financials sector trades at its economic book value. Figure 2 shows that the Telecom Services sector has the lowest trailing PEBV ratio, and the Real Estate Sector has the highest trailing PEBV ratio among the eleven All Cap Index sectors based on prices as of 8/12/22 and financial data from 2Q22 10-Qs.

A trailing PEBV ratio of 0.6 means investors expect the Telecom Service sector’s profits to decline by 40% from TTM through 2Q22 levels. On the flip side, investors expect the Real Estate and Consumer Cyclicals sectors (trailing PEBV ratios of 3.8 and 2.1) to improve profits more than any other All Cap Index sectors.

Below, I highlight the Telecom Services sector, which had the lowest PEBV ratio through 8/12/22.

Sample Sector Analysis: Telecom Services: Trailing PEBV Ratio = 0.6

Figure 1 shows the trailing PEBV ratio for the Telecom Services sector rose from 0.5 as of 6/30/22 to 0.6 as of 8/12/22. The Telecom Services sector market cap 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 $1.1trillion as of 8/12/22.

Figure 1: Telecom Services Trailing PEBV Ratio: December 1998 – 8/12/22

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

Figure 2 compares the trends for market cap and economic book value for the Telecom Services sector since 1998. I sum the individual NC 2000/sector constituent values for market cap and economic book value. I call this approach the “Aggregate” methodology, and it matches S&P Global’s (SPGI) methodology for these calculations.

Figure 2: Telecom Services Market Cap & Economic Book Value: December 1998 – 8/12/22

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

The Aggregate methodology provides a straightforward look at the entire NC 2000/sector, regardless of firm size or index weighting, and matches how S&P Global (SPGI) calculates metrics for the S&P 500.

For additional perspective, I compare the Aggregate method for trailing PEBV ratio with two other market-weighted methodologies. Each method has its pros and cons, which are detailed in the Appendix.

Figure 3 compares these three methods for calculating the Telecom Services sector’s trailing PEBV ratios.

Figure 3: Telecom Services Trailing PEBV Ratio Methodologies Compared: December 1998 – 8/12/22

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

Disclosure: David Trainer, Kyle Guske II, Matt Shuler, and Brian Pellegrini receive no compensation to write about any specific stock, style, or theme.

Appendix: Analyzing Trailing PEBV Ratio with Different Weighting Methodologies

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

The Aggregate methodology provides a straightforward look at the entire NC 2000/sector, regardless of firm size or index weighting, and matches how S&P Global (SPGI) calculates metrics for the S&P 500.

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

Market-weighted metrics – calculated by market-cap-weighting the trailing PEBV ratio for the individual companies relative to their sector or the overall NC 2000 in each period. Details:

1. Company weight equals the company’s market cap divided by the market cap of the NC 2000 or its sector
2. I multiply each company’s trailing PEBV ratio by its weight
3. NC 2000/Sector trailing PEBV ratio equals the sum of the weighted trailing PEBV ratios for all the companies in the NC 2000/sector

Market-weighted drivers – calculated by market-cap-weighting the market cap and economic book value for the individual companies in each sector in each period. Details:

1. Company weight equals the company’s market cap divided by the market cap of the NC 2000 or its sector
2. I multiply each company’s market cap and economic book value by its weight
3. I sum the weighted market cap and weighted economic book value for each company in the NC 2000/each sector to determine the NC 2000 or sector’s weighted market cap and weighted economic book value
4. NC 2000/Sector trailing PEBV ratio equals weighted NC 2000/sector market cap divided by weighted NC 2000/sector economic book value

Each methodology has its pros and cons, as outlined below:

Aggregate method

Pros:

• A straightforward look at the entire NC 2000/sector, regardless of company size or weighting.
• Matches how S&P Global calculates metrics for the S&P 500.

Cons:

• Vulnerable to impact of companies entering/exiting the group of companies, which could unduly affect aggregate values. Also susceptible to outliers in any one period.

Market-weighted metrics method

Pros:

• Accounts for a firm’s market cap relative to the NC 2000/sector and weights its metrics accordingly.

Cons:

• Vulnerable to outlier results from a single company disproportionately impacting the overall trailing PEBV ratio.

Market-weighted drivers method

Pros:

• Accounts for a firm’s market cap relative to the NC 2000/sector and weights its size and economic book value accordingly.
• Mitigates the disproportionate impact of outlier results from one company on the overall results.

Cons:

• More susceptible to large swings in market cap or economic book value (which can be impacted by changes in WACC) period over period, particularly from firms with a large weighting in the NC 2000/Sector.