Investors Are Paying Historically High Sales Multiples by Eric Bush, CFA – Gavekal Capital Blog
By any measure, DM Americas stocks aren’t cheap. The median price to cash flow ratio in the GKCI DM Americas Index is a hefty 12.39x. While this is certainly high, current price to cash flow valuations are in line with valuation ranges in 2004-2007 and in 2014-2015. On the other hand, it seems that lack of global demand has driven up investors risk tolerance when it comes to sales. Current median price to sales multiples overall for DM Americas stocks are higher today than they have been at any point since 2001. The median price to sales ratio is 2.33x, which is higher than they highest point reached in 2007 (2.21x) and 2014 (2.27x).
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Breaking down the equity market by sector we see sectors, consumer staples and utilities, that are trading at the most expensive price to sales ratio we have seen going back to 2000. Consumer staples are trading at 38% premium to the the levels it was trading at in 2007 while utilities are trading at a 46% premium. Industrials are actually trading below valuation highs made in 2013, but the median industrial company is trading at multiples that are higher than the highest multiples in anytime from 2000-2012 period.
The median price to sales multiple for consumer discretionary and health care stocks are above 2007 highs but remain below 2000. The median consumer discretionary stock is trading at a 11% premium to valuation highs in 2007 and the median health care stock is trading at a 14% premium.
Financials aren’t cheap either. Currently, the median financial stock is trading at 2.81x sales. This is below valuation level from 2003-2006, however, it is still over 60% higher than the multiples that financial stocks were commanding in 2000. Telecom stocks are basically trading at the highest price to sales multiples since 2007.
Finally, even the downtrodden energy and materials sectors aren’t immune to high price to sales ratio. The median energy price to sales ratio has rocketed from 1.45x earlier this year to 2.85x while the median materials price to sales ratio has gone from 1.34x and to 1.99. In both cases, median price to sales ratios are higher than what these stocks were trading at in 2000.