Cyclical companies appear to be overvalued

EUROPE

Investors have capitulated on growth resulting in cyclical companies being significantly overvalued.

Arcelor and SKF are accurate proxies for world industrial production and both have made an average, over the cycle, EBIT return on capital employed of 15% – falling to around 10% after accruing for interest and tax. This quantum of return results in an average 1.3x enterprise value to capital employed with enterprise value being the stock market value of the company + net debt ie 100% value for the company’s existing assets and an extra 30% for ‘future value’, or hope. Today SKF and Arcelor trade on 1.9x and 1.5x their capital employed. The EU’s response to Greece has been shambolic not ...