Regions, Revenues and Valuation

Does the market attribute a higher valuation to companies that have more diversified revenues? I approximated the degree of diversification using the percentage of revenues that are earned outside the domestic market. Companies with higher foreign revenues should be perceived as more diversified and thus receive a higher valuation in terms of CAPE. Let’s see if this is true.

The Data

• Company revenue split by currency was obtained from financial reports. I sed companies from the SP 500, EUROSTOXX50, Topix and FTSE 100 indices, for a total of 200 companies across a number of sectors.
• Data necessary to estimate CAPE (cyclically adjusted PE) was downloaded from Bloomberg.
• I used EPS before extraordinary to compute the CAPE
• To account for outliers, CAPEs which are above 2x StDev from the mean are substituted with the median

Analysis

Quartiles

I run the analysis looking at both mean and average across the entire sample. As I am using adjusted before extraordinary EPS to calculate the CAPE, the difference between averages and medians across the sample is not very significant, thus the conclusions below are applicable in both scenarios.

There does not appear to be a significant difference between averages in different quartiles. Running a more formal analysis, we can observe that the only significantly different average is the third quartile one. The difference is significant at the 90% level.

This could be due to both the presence of outliers and the concentration around the third quartile of sector which have a higher valuation (consumer discretionary, Financials and IT)

Conclusion: companies that derive between roughly 50 and 75% of their revenues in their domestic market appear to achieve higher valuations, but the relationship is not very robust.

Sectors

There does not appear to be a direct correlation between revenue source, sector and CAPE. In the rare cases when there is a positive or negative correlation between share of domestic revenues and sector, the relationship is driven by one or two outliers. To conduct more formal tests, it would be necessary to gather more data, as for some sectors there are only a few data points available.

The only exception is industrials, which appear to have higher valuations when they are focused on international markets (see graph below)

Conclusions: there does not appear to be a significant relationship tying sector, revenue diversification and valuations.

Regions

Finally I looked at the split by region, to see whether when subdividing the sample into the index components, a relationship could be found.

The most significant conclusion is that there is a negative relationship between the proportion of domestic revenues and the valuation as proxied by CAPE. This relationship is not so markedly evident when we consider the full sample. This is due to the effect of the mild negative relationship in the Topix and SP500 constituents.

The graph has been zoomed in to exclude outliers and to better show the negative relationship

If we increase the adjustment for outliers, decreasing the number of standard deviations above which we substitute the median value for the original one, the strength of the negative relationship decreases but is still present.

The explanatory power of the relationship is however low, with the exception of the EUROSTOXX constituents, the only to have an R^2 larger than 20%.

Conclusions: companies in Europe appear to achieve a premium valuation if they are more revenue diversified. The relationship however is not robust.

So what?

Overall, companies that have a more geographically diversified source of revenues do not appear to receive a markedly better valuation on the market.

 

 

These taxing Taxes

Who is really supporting the burden of taxes? Are the rich really paying too little (or too much)? How is income distributed by tax bracket?

I have always been interested in finding an answer to these questions, and have conducted a short analysis to see if I could get to the bottom of it.

The Data

I downloaded data from the Italian , the UK , and the US tax agencies on income tax distributions. The data is in thousands of LCU, therefore comparisons across salary levels are not completely accurate. However we can assume, for simplicity sake, that earning 15k EUR per year is basically equivalent to earning 15k GBP or 15k USD. Additionally, I have assumed equally distributed taxes and earnings within income tax groups to compute quartiles. I have tried to be as accurate as the data granularity would allow, but consider all figures to be approximations.

The Analysis

From looking at the overall distribution, we can immediately see that there are considerably more people earning salaries in excess of 100k in the US than in the other two countries. Additionally, when comparing redistributive effects of taxes, again the US has a much more redistributive system, meaning that a larger proportion of taxes is paid by those earning the highest salaries compared to the other two countries.

This becomes more evident when we analyse the data on the dividing the population in quartiles. The richest 25% earn more than 50% and pay more than 70% of all taxes in all three countries. This is somewhat to be expected, however I was surprised by the extent of the concentration of both earnings power and taxation in the top quartile.

I decided to investigate further and focused on the top 1 and 5% richest taxpayers, or at least, of those that declare the largest income. A couple of interesting conclusions from this graphs are that the UK seems to be taxing the richest more, when we look at the difference between percentage of income and taxes earned by the richest 1 and 5%. This has to be caveated with the fact that this analysis is only looking at income tax, and thus not providing a complete picture of the tax burden or actual income distribution.

Finally, I wanted to have a look at visualizing equality as a “GINI curve”. The larger the area between the 45* line in the graph and the underlying income and taxes distribution, the more unequal the system is. Overall, we can appreciate that the income inequality is stronger in the US, however the tax system appears to be accounting for that difference and increasing the burden of paying taxes to the richest.

Overall, it appears to me that the assumption that the rich are not paying their share is not reflected in the numbers. On the contrary, I might suggest that 25% of the richest population supporting over 70% of the tax burden may even be excessive. This is to be coupled with the fact that, at higher earnings, and with higher tax rates, the incentive is to find ways to avoid paying those taxes, especially if they are perceived to be unjustly high and / or are not reflected in the level of services the state provides. In this context, I would like to point out the fact that only 1% of the population in Italy declares to be earning more than 100k EUR per year, compared to 2.5% in the UK and a whopping 25% in the US…. An additional point is the number of people paying income tax as compared to the total population. In Italy, about 40m people are paying income tax, on a population of 60m. In the UK the figure is even lower, with 30m income taxpayers on a population of 64 m. Finally, in the US, there are 320 m people, but only 150m are paying income tax. And considering that in all governments , income tax accounts for anywhere from 30 to 50% of the national budget, you can draw your own conclusions…