All Cap Index & Sectors: Price to Book Value Increased to 12/12/22

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The trailing (PEBV) ratio for the NC 2000 increased from 1.2 as of 6/30/22 to 1.4 as of 12/12/22. The NC 2000 consists of the largest 2000 US companies by market capitalization in my company’s coverage. The constituents 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 industry trends. I calculate these metrics using the S&P Global (SPGI) methodology, which sums individual NC 2000 file values ​​for market capitalization and economic book value before using them to calculate the metrics. I call this the “Aggregate” methodology.

Based on the most recent audited financial data available, in most cases the 2Q22 10-Q. Price details are as of 8/12/22. See the appendices for more information on calculation methods.

NC 2000 Trailing PEBV Ratio Increased From 6/30/22 to 8/12/22

The lagging PEBV ratio compares the projected future gains of the NC 2000 (as reflected in the price) to the economic book value on 8/12/22. The NC 2000’s PEBV ratio of 1.4 implies that the NC 2000’s earnings (NOPAT) will increase 40% from the last twelve months (TTM) to the 2Q22 level.

Key Details on Selected NC 2000 Sectors

Three NC 2000 sectors, telecom services, energy and materials, trade below their economic book value. The financial sector trades at its economic book value. Figure 2 shows that the telecom services sector has the lowest lagging PEBV ratio and the real estate sector has the highest lagging PEBV ratio of the eleven All Cap Index sectors based on prices as of 8/12/22 and financial data from 2Q22 10- Ask.

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

Below I highlight the Telecom Services sector, which had the lowest PEBV ratio up to and including 8/12/22.

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

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

Figure 1: Telecom services backlog PEBV ratio: December 1998 – 8/12/22

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

Figure 2 compares the market capitalization and economic book value trends for the Telecom Services sector since 1998. I summarize the individual NC 2000/sector constituent values ​​for market capitalization and economic book value. I call this approach the ‘Aggregate’ methodology and it aligns with the S&P Global (SPGI) methodology for these calculations.

Figure 2: Telecom services market capitalization and economic book value: December 1998 – 22/12/08

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

The Aggregate methodology provides a clear view of the entire NC 2000/industry, regardless of company size or index weighting, and is consistent with how S&P Global (SPGI) calculates metrics for the S&P 500.

For additional perspective, I compare the Aggregate method of tracking the PEBV ratio with two other market-weighted methodologies. Each method has its advantages and disadvantages, which are described in the appendix.

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

Figure 3: Telecom services with lagging PEBV ratio methodologies compared: December 1998 – 12/12/22

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

Disclosure: David Trainer, Kyle Guske II, Matt Shuler, and Brian Pellegrini are not remunerated to write about a specific stock, style, or theme.

Appendix: Analyzing Trailing PEBV Ratio with Different Weighting Methods

I derive the above stats by adding the individual NC 2000/sector stock 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 clear view of the entire NC 2000/industry, regardless of company size or index weighting, and is consistent with how S&P Global (SPGI) calculates metrics for the S&P 500.

For additional perspective, I compare the Aggregate method of tracking the 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 for comparison anyway:

Market Weighted Statistics – calculated by weighting the market capitalization of the lagging PEBV ratio for the individual companies relative to their sector or the total NC 2000 in each period. Details:

  1. Company weight is equal to the company’s market capitalization divided by the market capitalization 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 is equal to the sum of weighted trailing PEBV ratios for all companies in the NC 2000/sector

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

  1. Company weight is equal to the company’s market capitalization divided by the market capitalization of the NC 2000 or its sector
  2. I multiply the market capitalization and economic book value of each company by its weight
  3. I add up the weighted market cap and the weighted economic book value for 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. NC 2000/Sector trailing PEBV ratio is equal to weighted NC 2000/sector market capitalization divided by weighted NC 2000/sector economic book value

Each method has its pros and cons, as described below:

Aggregated method:

Advantages:

  • A direct look at the entire NC 2000/industry, regardless of company size or weight.
  • Corresponds to how S&P Global calculates statistics for the S&P 500.

cons:

  • Vulnerable to the impact of companies entering/leaving the group of companies, which could have an excessive impact on the total values. Also sensitive to outliers in a certain period.

Market Weighted Statistics method

Advantages:

  • Takes into account a company’s market cap relative to the NC 2000/sector and weights the stats accordingly.

cons:

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

Market-weighted drivers method

Advantages:

  • Represents 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 one company’s outlier results on overall results.

cons:

  • More prone to large fluctuations in market capitalization or economic book value (which may be affected by changes in the WACC) over time, especially of companies with a large weighting in the NC 2000/Sector.

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