Yahoo Finance Market Cool On Teekay Corporation's (NYSE:TK) Revenues
Teekay Corporation's (NYSE:TK) price-to-sales (or "P/S") ratio of 0.5x may look like a pretty appealing investment opportunity when you consider close to half the companies in the Oil and Gas industry in the United States have P/S ratios greater than 1.3x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.
Check out our latest analysis for Teekay
What Does Teekay's Recent Performance Look Like?
With revenue growth that's exceedingly strong of late, Teekay has been doing very well. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Although there are no analyst estimates available for Teekay, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
What Are Revenue Growth Metrics Telling Us About The Low P/S?
Teekay's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.
Taking a look back first, we see that the company grew revenue by an impressive 74% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 6.7% drop in revenue in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.
This is in contrast to the rest of the industry, which is expected to decline by 9.1% over the next year, even worse than the company's recent medium-term annualised revenue decline.
With this information, it's perhaps strange but not a major surprise that Teekay is trading at a lower P/S in comparison. There's no guarantee the P/S has found a floor yet with recent revenue going backwards, despite the industry heading down even harder. There is still potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth, which would be difficult to do with the current industry outlook.
The Bottom Line On Teekay's P/S
It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
As we've mentioned, Teekay's lower than industry P/S comes as a bit of a surprise due to its recent three-year revenue not being as bad as the forecasts for a struggling industry. When we see better than average revenue growth but a lower than average P/S, we must assume that potential risks are what might be placing significant pressure on the P/S ratio. The most obvious risk is that its revenue trajectory may not keep outperforming under these tough industry conditions. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see a lot of volatility.
A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Teekay with six simple checks on some of these key factors.
If you're unsure about the strength of Teekay's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.
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