One of the easiest ways for investors to value shares is the humble price-to earnings ratio (p/e).
While no single metric should be used in isolation, historically shares bought at low price-to earnings ratios afford higher earnings yields than shares bought at higher ratios of price-to-earnings. The earnings yield is the yield which shareholders would receive if all the earnings were paid out as a dividend.
First, we want to know where the overall Australian share market is right now in terms of value, and for that we look at the market p/e, which is currently around 16.
Next, we compare the current market p/e to historical p/e's for the market to tell us whether the market is relatively cheap or expensive.
If you take a quick look at the chart below, you can see that a market p/e of 16 is around average for our overall share market (blue line).
![UOlay[1]](https://brokersbegone.com/wp-content/uploads/2016/01/UOlay1.jpg)
So, now we know that the share market is currently around its average p/e.
Next, we want to compare shares with the average price-to-earnings ratio in their individual sectors. This like-for-like comparison provides a great indicator of whether companies are cheap or expensive relative to their index. For the purpose of this analysis, I've focused on large-cap companies only.
Here are 34 shares that are currently cheap relative to their indices. Note that the data for the p/e ratios is taken from Commsec data feeds or the companies' reports.
Consumer Discretionary Sector
The current average price-to-earnings ratio for the Consumer Discretionary sector is 19.75.
There is currently one large cap share that's cheap compared to the average sector p/e ratio:
| Consumer Discretionary | Index p/e | P/E |
| Crown Resorts Limited (ASX: CWN) | 19.75 | 18.77 |
Consumer Staples Sector
The current average price-to-earnings ratio for the Consumer Staples sector is 19.50.
There are currently three large cap shares that are cheap compared to the average sector p/e ratio:
| Consumer Staples | Index p/e | P/E |
| Wesfarmers Ltd (ASX: WES) | 19.50 | 18.95 |
| Coca-Cola Amatil Ltd (ASX: CCL) | 19.50 | 16.70 |
| Woolworths Limited (ASX: WOW) | 19.50 | 12.27 |
Materials Sector
The current average price-to-earnings ratio for the materials sector is 19.10.
There are currently five large cap shares that are cheap compared to the average sector p/e ratio:
| Materials | Index p/e | P/E |
| Rio Tinto Limited (ASX: RIO) | 19.10 | 17.32 |
| Amcor Limited (ASX: AMC) | 19.10 | 16.75 |
| BHP Billiton Limited (ASX: BHP) | 19.10 | 16.55 |
| James Hardie Industries PLC (ASX: JHX) | 19.10 | 15.73 |
| Incitec Pivot Ltd (ASX: IPL) | 19.10 | 13.15 |
Industrials Sector
The current average price-to-earnings ratio for the Industrials Sector is 23.51.
There are currently five large cap shares that are cheap compared to the average sector p/e ratio:
| Industrials Sector | Index p/e | P/E |
| Asciano Ltd (ASX: AIO) | 23.51 | 23.05 |
| Brambles Ltd (ASX: BXB) | 23.51 | 20.72 |
| CIMIC Group Ltd (ASX: CIM) | 23.51 | 17.8 |
| Qantas Airways Limited (ASX: QAN) | 23.51 | 15 |
| Aurizon Holdings Ltd (ASX: AZJ) | 23.51 | 13.42 |
Healthcare Sector
The current average price-to-earnings ratio for the Healthcare Sector is 25.76.
There is currently only one large cap share that is cheap compared to the average sector p/e ratio:
| Healthcare Sector | Index p/e | P/E |
| Sonic Healthcare Limited (ASX: SHL) | 25.76 | 20.77 |
Financials Sector
The current average price-to-earnings ratio for the Financials Sector is 16.71.
There are currently fourteen large cap shares that are cheap compared to the average sector p/e ratio:
| Financials Sector | Index p/e | P/E |
| AMP Limited (ASX: AMP) | 16.71 | 15.63 |
| Macquarie Group Ltd (ASX: MQG) | 16.71 | 15.49 |
| Commonwealth Bank of Australia (ASX: CBA) | 16.71 | 14.51 |
| Suncorp Group Ltd (ASX: SUN) | 16.71 | 13.11 |
| Westpac Banking Corp (ASX: WBC) | 16.71 | 12.31 |
| QBE Insurance Group Ltd (ASX: QBE) | 16.71 | 12.3 |
| Lend Lease Group (ASX: LLC) | 16.71 | 12.13 |
| Vicinity Centres Re Ltd (ASX: VCX) | 16.71 | 11.7 |
| National Australia Bank Ltd (ASX: NAB) | 16.71 | 11.29 |
| Mirvac Group (ASX: MGR) | 16.71 | 11.24 |
| DEXUS Property Group (ASX: DXS) | 16.71 | 10.72 |
| Stockland Corporation Ltd (ASX: SGP) | 16.71 | 10.54 |
| Australia and New Zealand Banking Group (ASX: ANZ) | 16.71 | 9.34 |
| Goodman Group Pty Ltd (ASX: GMG) | 16.71 | 9.11 |
Information Technology Sector
The current average price-to-earnings ratio for the Information Technology Sector is 23.33.
There are no large cap shares that are cheap compared to the average sector p/e ratio:
Utilities Sector
The current average price-to-earnings ratio for the Utilities sector is 23.84.
There are currently three large cap shares that are cheap compared to the average sector p/e ratio:
| Utilities Sector | Index p/e | P/E |
| AusNet Services (ASX: AST) | 23.84 | 19.68 |
| AGL Energy Ltd (ASX: AGL) | 23.84 | 14.63 |
| APA Group (ASX: APA) | 23.84 | 13.62 |
Telecommunication Services Sector
The current average price-to-earnings ratio for the Telecommunication Services is 17.79.
There are currently two large cap shares that are cheap compared to the average sector p/e ratio:
| Telecommunication Services Sector | Index p/e | P/E |
| Telstra Corporation Ltd (ASX: TLS) | 17.79 | 16.16 |
| Spark New Zealand Ltd (ASX: SPK) | 17.79 | 16.09 |
As with all analysis, I'm not suggesting that you race out and buy these shares immediately, but use it as a starting point for your investment analysis. Additionally, there are reasons why shares are selling at p/e's below the average price-to-earnings ratio in their individual sectors. For example a low p/e ratio is often a sign that the market is expecting a company's earnings to fall. So make sure you do your homework!
