This report is an abridged and free version of S&P 500 & Sectors: Price-to-Economic Book Value Through 3Q21, one of the reports in our quarterly series on fundamental market and sector trends, available to Pro and higher members. More free reports on the fundamental trends for the overall market and each sector are here.
The full version of this report analyzes[1][2] market cap, economic book value, and the trailing price-to-economic book value (PEBV) ratio for the S&P 500 and each of its sectors (last quarter’s analysis is here).
These reports leverage more reliable fundamental data[3] that overcomes flaws with legacy fundamental datasets to provide a more informed view of the fundamentals and valuations of companies and sectors. Our Earnings Distortion research has been shown to generate a new source of alpha.
S&P 500 Trailing PEBV Ratio Fell Year-over-Year
The trailing PEBV ratio for the S&P 500 remains unchanged year-over-year at 1.5 in 3Q21. The S&P 500 trailing PEBV ratio was around this level for much of 2017-2019, before falling in early 2020.
This trailing PEBV ratio compares the S&P 500’s expected future profits (embedded in its equity valuation) to TTM profits in 3Q21. At 1.5, the S&P 500’s valuation implies the profits (NOPAT) of the S&P 500 will increase 50% from 3Q21 levels.
See Figure 1 in the full version of our report for the chart of the PEBV ratio for the S&P 500 from December 2004 through 3Q21.
Key Details on Select S&P 500 Sectors
Two S&P 500 sectors, Telecom Services and Consumer Non-cyclicals, trade below their economic book value and two, Healthcare and Financials, trade at their economic book value. The Telecom Services sector has the lowest trailing PEBV ratio among all 11 S&P 500 sectors based on prices as of 11/16/21 and financial data from 3Q21 10-Qs.
A trailing PEBV ratio of 0.5 means the market expects the Telecom Services sector’s profits as of 3Q21 to decline by 50% from current levels. On the flip side, investors expect the Real Estate and Energy sectors (trailing PEBV ratios of 3.9 and 3.1) to improve profits more than any other S&P 500 sectors.
Below, we highlight the Telecom Services sector, which has the lowest PEBV ratio of the S&P 500 sectors.
Sample Sector Analysis[4]: Telecom Services: Trailing PEBV Ratio = 0.5
Figure 1 shows the trailing PEBV ratio for the Telecom Services sector fell from 0.8 in 3Q20 to 0.5 in 3Q21. The Telecom Services sector market cap fell from $758 billion in 3Q20 to $677 billion in 3Q21, while its economic book value rose from $997 billion in 3Q20 to $1.5 trillion in 3Q21.
Figure 1: Telecom Services Trailing PEBV Ratio: December 2004 – 11/16/21
Sources: New Constructs, LLC and company filings.
The November 16, 2021 measurement period uses price data as of that date and incorporates the financial data from 3Q21 10-Qs, as this is the earliest date for which all the calendar 3Q21 10-Qs for the S&P 500 constituents were available.
Figure 2 compares the market cap and economic book value trends for the Telecom Services sector since 2004. We sum the individual S&P 500/sector constituent values for market cap and economic book value. We 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 2004 – 11/16/21
Sources: New Constructs, LLC and company filings.
The November 16, 2021 measurement period uses price data as of that date and incorporates the financial data from 3Q21 10-Qs, as this is the earliest date for which all the calendar 3Q21 10-Qs for the S&P 500 constituents were available.
The Aggregate methodology provides a straightforward look at the entire S&P 500/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, we compare the Aggregate method for trailing PEBV ratio with two other market-weighted methodologies: market-weighted metrics and market-weighted drivers. These market-weighted methodologies add more value for ratios that do not include market values, e.g. ROIC and its drivers, but we include them here, nonetheless, for comparison. 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 trailing PEBV ratio.
Figure 3: Telecom Services Trailing PEBV Ratio Methodologies Compared: December 2004 – 11/16/21
Sources: New Constructs, LLC and company filings.
The November 16, 2021 measurement period uses price data as of that date and incorporates the financial data from 3Q21 10-Qs, as this is the earliest date for which all the calendar 3Q21 10-Qs for the S&P 500 constituents were available.
This article originally published on November 24, 2021.
Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.
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Appendix: Analyzing Trailing PEBV Ratio with Different Weighting Methodologies
We derive the metrics above by summing the individual S&P 500/sector constituent values for market cap and economic book value to calculate trailing PEBV ratio. We call this approach the “Aggregate” methodology.
The Aggregate methodology provides a straightforward look at the entire S&P 500/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, we 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 we 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 S&P 500 in each period. Details:
- Company weight equals the company’s market cap divided by the market cap of the S&P 500 or its sector
- We multiply each company’s trailing PEBV ratio by its weight
- S&P 500/Sector trailing PEBV equals the sum of the weighted trailing PEBV ratios for all the companies in the S&P 500/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:
- Company weight equals the company’s market cap divided by the market cap of the S&P 500 or its sector
- We multiply each company’s market cap and economic book value by its weight
- We sum the weighted market cap and weighted economic book value for each company in the S&P 500/each sector to determine the S&P 500 or sector’s weighted FCF and weighted enterprise value
- S&P 500/Sector trailing PEBV ratio equals weighted S&P 500/sector market cap divided by weighted S&P 500/sector economic book value
Each methodology has its pros and cons, as outlined below:
Aggregate method
Pros:
- A straightforward look at the entire S&P 500/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 S&P 500/sector and weights its metrics accordingly.
Cons:
- Vulnerable to outlier results from a single company disproportionately impacting the overall trailing PEBV ratio, as we’ll show below.
Market-weighted drivers method
Pros:
- Accounts for a firm’s market cap relative to the S&P 500/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 S&P 500/Sector.
[1] We calculate these metrics based on S&P Global’s (SPGI) methodology, which sums the individual S&P 500 constituent values for market cap and economic book value before using them to calculate the metrics. We call this the “Aggregate” methodology.
[2] Our research is based on the latest audited financial data, which is the 3Q21 10-Q in most cases. Price data is as of 11/16/21.
[3] Three independent studies prove the superiority of our data, models, and ratings. Learn more here.
[4] The full version of this report provides analysis for every sector like what we show for this sector.