Telstra Group Limited (ASX:TLS) Investors Are Less Pessimistic Than Expected
When you see that almost half of the companies in the Telecom industry in Australia have price-to-sales ratios (or "P/S") below 1.3x, Telstra Group Limited (ASX:TLS) looks to be giving off some sell signals with its 2.4x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.
Check out our latest analysis for Telstra Group
How Has Telstra Group Performed Recently?
Telstra 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. 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 Telstra Group will help you uncover what's on the horizon.How Is Telstra Group's Revenue Growth Trending?
Telstra Group's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.
Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. Fortunately, a few good years before that means that it was still able to grow revenue by 8.7% in total over the last three years. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.
Turning to the outlook, the next three years should generate growth of 2.4% per year as estimated by the twelve analysts watching the company. With the industry predicted to deliver 3.3% growth per year, the company is positioned for a comparable revenue result.
With this in consideration, we find it intriguing that Telstra Group's P/S is higher than its industry peers. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.
The Final Word
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.
Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that Telstra Group currently trades on a higher than expected P/S. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.
Having said that, be aware Telstra Group is showing 2 warning signs in our investment analysis, you should know about.
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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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.