There wouldn't be many who think International Game Technology PLC's (NYSE:IGT) price-to-sales (or "P/S") ratio of 1.3x is worth a mention when the median P/S for the Hospitality industry in the United States is similar at about 1.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.
See our latest analysis for International Game Technology
What Does International Game Technology's P/S Mean For Shareholders?
Recent revenue growth for International Game Technology has been in line with the industry. The P/S ratio is probably moderate because investors think this modest revenue performance will continue. If this is the case, then at least existing shareholders won't be losing sleep over the current share price.
Want the full picture on analyst estimates for the company? Then our free report on International Game Technology will help you uncover what's on the horizon.Do Revenue Forecasts Match The P/S Ratio?
The only time you'd be comfortable seeing a P/S like International Game Technology's is when the company's growth is tracking the industry closely.
If we review the last year of revenue growth, the company posted a worthy increase of 14%. Still, lamentably revenue has fallen 41% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.
Looking ahead now, revenue is anticipated to climb by 4.7% during the coming year according to the seven analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 15%, which is noticeably more attractive.
With this information, we find it interesting that International Game Technology is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.
The Key Takeaway
We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
Our look at the analysts forecasts of International Game Technology's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.
It is also worth noting that we have found 1 warning sign for International Game Technology that you need to take into consideration.
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.