Home Value Investing UK Market Valuations Using EV/EBIT, P/E, And P/BV

UK Market Valuations Using EV/EBIT, P/E, And P/BV

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In Which Direction The UK Market Should Go? by Bargain Value

Today, we would like to compare the historic level of a few indicators (EV/EBIT, P/E, P/BV) with a current value of them and try to figure out, what that mean for the UK market. We have tested three of them earlier, however we have focused on the usefulness for a building of model folio and searching the “pearls”. In this article, we will look at them from the wider perspective and try to establish three things:

  • is the market over or undervalued?
  • how “strong” is the market?
  • is the dividend munificent?

Let’s start with the four, value indicators:


On the chart above, we can see three main bottoms and three main peaks. We can notice, that the current value is even higher, than in 2007, before the crisis. The 10 years, average value is 18.72 and today’s median is 22.07. It is the difference of +17.9%, which is quite large. This fact and the shape of the path implicates, that we can expect the decline of this indicator. The question is, if it will be done by the fall of the price or by the rise of the operating profit.

2. P/E

UK market

The next indicator has been very useful for stock picking, let’s check what will tell us about the whole market. At the glance, we can notice, that this chart is very similar to the previous one. The 10 years average is 17.89 and the current level is 20.89.  As before, we have a big difference of +17.10%. We can expect, that P/E should go down during the next months. It is not a good information, especially after very harsh beginning of 2016.

3. P/BV

UK market

This chart is not as clear as the previous ones. We can see a one, big fall during the 2007-2008 crisis. Then, this indicator is going rather up, than down (on bigger fall during 2011). During the last 2 years, the slowdown can be noticed. The 2 peaks on the similar level, have been created and the P/BV is going down since the second semester of 2015. This tendency is same as for the P/E and EV/EBIT. However, the current level of this ratio is 2.54 and it is only +4.10% higher, than the average of 2.44. Due to this fact, we can consider the current P/BV level as optimal. It is hard to say, in which direction should it go, especially when we take into consideration the much higher level in 2006-2007 (3.0-3.5). Maybe, there is a place to growth.

4. EV/S

UK market

The chart above presents the path of a very similar indicator to the first one and the shapes are similar too. However, there is a one big difference. The current level of EV/S is 2.34, which is only +6.36% more, that the 10 years average of 2.2. We can expect, that this value is close to optimal one. On the other hand, the chart suggests a strong resistance on the level of 2.5. EV/S reached it during the first semester of 2015. Due to this fact, we can expect the declines, which shouldn’t however, bring this ratio below 1.8.

We have analyzed the 4 value indicators. We are going to present the conclusions later in this article. Now, let’s continue and take a look on the next 2 charts:

UK market – Relative Strength

UK market

For sure, we can see a lot more fluctuations on this chart. Nonetheless, most of the crucial declines can be noticed (2007-2008, 2010-2011, 2014), same as the increases. If we exclude the very intense period of the financial crisis and later recover, it is clear, that the value of this indicator has been moving in the channel of 0-10% for most of the time. Only in 2011 and 2014 fell significantly under the 0%. We can recognize this channel as an optimal one. Currently, the value of relative strength index (-4.46%) is far lower, than the 10 years average (3.46%). It is a huge difference of 7 percentage points. If nothing bad happens, we should see the rebound of this indicator, signifficant growth and a lot better returns on the market.


UK market

The last chart is the hardest to analyze. The high level of the dividend yield during 2009 seems to be unusual. We should rather look at this as a one time event. The more typical value of this ratio is somewhere between 2.5% and 3.25%. Hence, the current level of 2.28% is quite low. Many dividend investors are not happy recently, because the stock prices have been to high in comparison to dividend. The strong support is established on the level of 2.5%, which has been broken. It is a very bad information, because it has happened only once before (2011), and even then, the value has quickly come back above this border. We can only hope, that the dividend yield will go back to the more typical interval.

We have analyzed 6 indicator. The table below shows the summary:

UK market

As we can see, we have 2 value indicators (EV/EBIT, P/E), which are significantly higher than the average. 2 next ones (P/BV, EV/S), are on the optimal level. The last 2 are completely below the average. The next table shows, in which direction should go each one of them in the near future:

UK market

What, that means?

  • The UK market is overvalued. 2 out of 4 indicators shows this. What is more, EV/S even close to the average, indicates the declines. Only P/BV is on the optimal level and presents a room for the value growth.
  • The market is “weak”. Relative strength index is very low. It should go up. In worse scenario it will fall to the level of -10% and then, rebound. In the worst case scenario we will be dealing with a next deep bear market, similar to the one in 2007-2008.
  • The dividend yield is very scanty. This indicator has fallen below its typical level and is backing up the statement about the market overvaluation.

Unfortunately, the UK market should go down. We must be prepared for the declines continuation.

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