Yahoo Finance The AZEK Company Inc.'s (NYSE:AZEK) Business Is Trailing The Industry But Its Shares Aren't
The AZEK Company Inc.'s (NYSE:AZEK) price-to-sales (or "P/S") ratio of 4.1x may look like a poor investment opportunity when you consider close to half the companies in the Building industry in the United States have P/S ratios below 1.2x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.
Check out our latest analysis for AZEK
How AZEK Has Been Performing
With revenue growth that's inferior to most other companies of late, AZEK has been relatively sluggish. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on AZEK.
Is There Enough Revenue Growth Forecasted For AZEK?
In order to justify its P/S ratio, AZEK would need to produce outstanding growth that's well in excess of the industry.
Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. However, a few strong years before that means that it was still able to grow revenue by an impressive 52% in total over the last three years. Accordingly, shareholders will be pleased, but also have some questions to ponder about the last 12 months.
Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 5.3% per year over the next three years. With the industry predicted to deliver 5.8% growth per annum, the company is positioned for a comparable revenue result.
With this in consideration, we find it intriguing that AZEK's P/S is higher than its industry peers. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.
The Key Takeaway
While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.
Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that AZEK currently trades on a higher than expected P/S. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for AZEK that you should be aware of.
It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
