There wouldn't be many who think OPENLANE, Inc.'s (NYSE:KAR) price-to-sales (or "P/S") ratio of 1.1x is worth a mention when the median P/S for the Commercial Services industry in the United States is very similar. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.
View our latest analysis for OPENLANE
How Has OPENLANE Performed Recently?
OPENLANE could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.
Want the full picture on analyst estimates for the company? Then our free report on OPENLANE will help you uncover what's on the horizon.Is There Some Revenue Growth Forecasted For OPENLANE?
The only time you'd be comfortable seeing a P/S like OPENLANE's is when the company's growth is tracking the industry closely.
Taking a look back first, we see that the company managed to grow revenues by a handy 5.5% last year. The solid recent performance means it was also able to grow revenue by 23% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.
Turning to the outlook, the next year should generate growth of 0.5% as estimated by the eight analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 8.2%, which is noticeably more attractive.
With this in mind, we find it intriguing that OPENLANE's P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.
The Bottom Line On OPENLANE's P/S
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.
Given that OPENLANE's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for OPENLANE that you should be aware of.
If you're unsure about the strength of OPENLANE'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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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.