Fisher and Paykel Healthcare has benefited from Covid-19 due to strong demand for its respiratory products. Photo / File
Fisher and Paykel Healthcare has benefited from Covid-19 due to strong demand for its respiratory products. Photo / File
The price of New Zealand stocks, relative to their earnings prospects, is running well ahead of past levels, says Forsyth Barr.
The broker estimates the 12-month, forward-weighted price earnings (PE) for the entire market is currently running at 31.7 times - 45 per cent above its five-year average.
Analysts arequick to point out that PE ratios are not a one-size-fits-all measure, but that they do provide a first-glance view of a stock's worth.
The professionals are more likely to use discounted cash flow valuations (DCF) to estimate the value of an investment based on a company's expected future cash flows.
Arguably one of the stocks hit hardest by the Covid-19 pandemic, Auckland International Airport, is the most expensive, judging from its 12-month forward PE of 100 times.
Salt Funds managing director Matt Goodson said there were a few "issues" surrounding PEs and that analysts were more likely to use DCF.
Auckland Airport's PE was high because of the Covid-driven collapse in its earnings. "The question now is the recovery path and increasingly, the June 2021 year is looking like a tough year, and June 2022 will at least be partially affected," he said.
"On Auckland Airport, you really have to look at the long term discounted cash flow valuation path rather than the one-year forward PE, when it has been heavily affected by one-off factors.
"You really have to form a view as to what the free cash flows of the business are going to look like in four or five years' time to form a view as to its valuation," said Goodson.
Then there are the companies which have benefited from Covid-19, such as Fisher and Paykel Healthcare, thanks to strong demand for its respiratory products.
"In normal times, company comparisons using PE one year forward would be fine, but it's particularly challenging at the moment because of these massive one-off factors," Goodson said.
In the big picture, the driving force behind sharemarkets and those high PEs is today's abnormally low bond yields, which are making equities look more attractive.
"That's something that people have to grapple with, but in comparing stocks PE is a useful first glance but it's not a one-size fits all," Goodson says.
Forsyth Barr's head of wealth management research, Matt Henry, says the broker's 31.7 times forward weighted PE for the market is high, but that that was a result of interest rates being abnormally low.
"Most assets are at elevated prices, relative to history, whether that's bonds, equities or property.
"There is no such thing as an inherently cheap or an inherently expensive asset - it's always relative," he says.
"There are no cheap assets in the world and New Zealand equities are certainly in that camp."
Fisher and Paykel Healthcare has benefited from Covid-19 due to strong demand for its respiratory products. Photo / File
Henry points out that the local market is dominated by a handful of stocks at the top.
"Those companies change over time. Telecom (now Spark) was once the biggest, and at one point Fletcher Building was the biggest."
Now the market is dominated by Meridian, Fisher and Paykel Healthcare and a2 Milk.
"Those companies typically have high multiples because of the growth that they have delivered recently."
In Meridian's case, the stock has been singled out for buying by exchange traded funds seeking defensive, green energy companies.
"Price/earnings is a reflection of a point in time, not long term earnings, so in the case of Auckland Airport people are factoring in an earnings recovery over the longer term and people are willing to pay for a high quality asset," says Henry.
"Given where interest rates are, there are very few cheap assets anywhere, as all the commentary out of the housing market will attest, and the New Zealand equity market has been a strong performer since the global financial crisis.
"We are definitely seeing full valuations and in some cases high valuations, but it's important to recognise that there is that compositional element to New Zealand, which means that when you look at the weighted average, we have got 15 stocks that represent 75 per cent of the index and three that represent a quarter of the index.
"If one of those stocks is F&P Healthcare, at 45 times, that clearly moves the average up."
