Yahoo Finance Montrose Environmental Group, Inc.'s (NYSE:MEG) Shares May Have Run Too Fast Too Soon
Montrose Environmental Group, Inc.'s (NYSE:MEG) price-to-sales (or "P/S") ratio of 1.6x may not look like an appealing investment opportunity when you consider close to half the companies in the Commercial Services industry in the United States have P/S ratios below 1.1x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.
See our latest analysis for Montrose Environmental Group
What Does Montrose Environmental Group's Recent Performance Look Like?
Montrose Environmental Group could be doing better as it's been growing revenue less than most other companies lately. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Want the full picture on analyst estimates for the company? Then our free report on Montrose Environmental Group will help you uncover what's on the horizon.
Do Revenue Forecasts Match The High P/S Ratio?
There's an inherent assumption that a company should outperform the industry for P/S ratios like Montrose Environmental Group's to be considered reasonable.
Taking a look back first, we see that the company managed to grow revenues by a handy 9.0% last year. The latest three year period has also seen an excellent 108% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.
Turning to the outlook, the next year should generate growth of 10% as estimated by the five analysts watching the company. With the industry predicted to deliver 10% growth , the company is positioned for a comparable revenue result.
In light of this, it's curious that Montrose Environmental Group's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.
The Key Takeaway
Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.
Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that Montrose Environmental Group 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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Montrose Environmental Group that you should be aware of.
If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.
