Valuation Dashboard: Energy And Materials - Update

Summary

• Valuation metrics in Energy and Materials.
• Evolution since last month.
• A list of stocks looking cheap in their industries.

This article series provides a monthly dashboard of industries in each sector of the GICS classification. It compares valuation and quality factors relative to their historical averages in each industry.

Executive Summary

Integrated Oil/Gas is undervalued for 3 valuation factors by 15% to 30% relative to historical averages. It is close to its historical average in profitability measured by median ROE. Paper/Wood and Metals/Mining are moderately overpriced and a bit above their baselines in profitability. Other industries in Energy and Materials are more overvalued. Packaging is the most overpriced combining all valuation metrics, but profitability is far above the historical average. At the opposite, profitability in Energy Equipment and Services is far below the baseline and can't be held as a justification for overpricing.

Anyway, I think systemic risk is more important than market valuation to manage a portfolio.

Since last month:

• P/E has improved in Chemicals and Construction Materials, no significant change in other industries.

• P/S has improved in Energy, Construction Materials, Packaging and deteriorated in Chemicals.

• P/FCF has improved in groups except a moderate deterioration in Energy Equipment/Services.

• ROE has improved in Construction Materials, Metals/Mining, no significant change elsewhere.

• The SPDR Select Sector ETF in Energy (NYSEARCA:XLE) has outperformed the SPDR S&P 500 ETF (SPY) by about 4% and the Materials ETF (NYSEARCA:XLB) has lagged it by about 1%.

• The five S&P 500 stocks in Energy and Materials with the best momentum in 1 month are Andeavor (ANDV), Apache Corp. (APA), ConocoPhillips (COP), Hess Corp. (HES), Marathon Petroleum Corp. (MPC).

Some Cheap Stocks In Their Industries

The stocks listed below are in the S&P 1500 index, cheaper than their respective industry factor for Price/Earnings, Price/Sales and Price/Free Cash Flow. The 10 companies with the highest Return on Equity are kept in the final selection. Quantitative Risk & Value members have every month an early access to the cheap stock lists in all sectors before they are published in free-access articles. Click here to read about performances. This is not investment advice. Do your own research before buying.

MPC	Marathon Petroleum Corp.	OILGASFUEL
ASIX	AdvanSix Inc.	CHEM
EMN	Eastman Chemical Co.	CHEM
LYB	LyondellBasell Industries	CHEM
FCX	Freeport-McMoRan Inc.	METAL
STLD	Steel Dynamics Inc.	METAL
SXC	SunCoke Energy Inc.	METAL
WOR	Worthington Industries Inc.	METAL
OI	Owens-Illinois Inc.	PACKAGING
SLGN	Silgan Holdings Inc	PACKAGING

Click to enlarge

Detail Of Valuation And Quality Indicators In Energy And Materials On 4/3/2018

I take 4 aggregate industry factors: Price/Earnings (P/E), Price to sales (P/S), Price to free cash flow (P/FCF), Return on Equity (ROE). My choice has been justified here and here. Their calculation aims at limiting the influence of outliers and large caps. They are reference values for stock picking, not for capital-weighted indices.

For each factor, I calculate the difference with its own historical average: to the average for valuation ratios, from the average for ROE, so that the higher is always the better. The difference is measured in percentage for valuation ratios, not for ROE (already in percentage).

The next table reports the 4 industry factors. There are 3 columns for each factor: the current value, the average ("Avg") between January 1999 and October 2015 taken as an arbitrary reference of fair valuation, and the difference explained above ("D-xxx").

	P/E	Avg	D- P/E	P/S	Avg	D- P/S	P/FCF	Avg	D- P/FCF	ROE	Avg	D-ROE
Energy Equip./Sces	31.38	24.2	-29.67%	1.25	1.73	27.75%	41.4	35.34	-17.15%	-9.11	7.34	-16.45
Integrated Oil/Gas	15.24	18.53	17.75%	2.23	3.35	33.43%	20.56	29.03	29.18%	3.34	4.47	-1.13
Chemicals	20.69	18.48	-11.96%	1.63	1.21	-34.71%	31.12	25.37	-22.66%	11.39	6.74	4.65
Construction Materials	21.24	21.44	0.93%	1.78	1.16	-53.45%	81.38	40.5	-100.94%	11.75	5.77	5.98
Packaging	23.98	17.96	-33.52%	1.13	0.61	-85.25%	30.85	20.09	-53.56%	21.92	8.34	13.58
Metals/Mining	22.41	19.83	-13.01%	2.4	2.65	9.43%	30.23	25.53	-18.41%	-7.47	-8.6	1.13
Paper/Wood	23.58	21.27	-10.86%	0.97	0.72	-34.72%	16.74	22.81	26.61%	9.65	4.99	4.66

Click to enlarge

The following charts give an idea of the current status of 3 valuation factors (P/E, P/S, P/FCF) and a quality factor (ROE) relative to their historical average in each industry. For all factors, the difference to average is calculated in the direction where positive is good. For valuation ratios, lower is better. For ROE, higher is better. On the charts below, higher is always better.

Price/Earnings relative to historical average:

Price/Sales relative to historical average:

Price/Free Cash Flow relative to historical average:

ROE relative to historical average:

Momentum

The next chart compares the price action of XLB and XLE with SPY in 1 month.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.