When close to half the companies in the Specialty Retail industry in the United States have price-to-sales ratios (or "P/S") below 0.4x, you may consider Abercrombie & Fitch Co. (NYSE:ANF) as a stock to potentially avoid with its 1.4x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.
How Has Abercrombie & Fitch Performed Recently?
With revenue growth that's superior to most other companies of late, Abercrombie & Fitch has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Abercrombie & Fitch.
How Is Abercrombie & Fitch's Revenue Growth Trending?
The only time you'd be truly comfortable seeing a P/S as high as Abercrombie & Fitch's is when the company's growth is on track to outshine the industry.
Retrospectively, the last year delivered an exceptional 16% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 37% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.
Turning to the outlook, the next year should generate growth of 6.1% as estimated by the nine analysts watching the company. With the industry only predicted to deliver 3.6%, the company is positioned for a stronger revenue result.
With this information, we can see why Abercrombie & Fitch is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
What Does Abercrombie & Fitch's P/S Mean For Investors?
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.
As we suspected, our examination of Abercrombie & Fitch's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.
You always need to take note of risks, for example - Abercrombie & Fitch has 2 warning signs we think you should be aware of.
If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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