"P/S doesn't mean anything."
Not so Dave. P/S is always listed as a key valuation metric along with P/E and PEG. In fact, it is more commonly used for technology companies, where P/E tends to be a good rear view mirror.
"Price to Sales Ratio
The trouble with the P/E ratio is that earnings is a complicated "bottom line" number, sometimes reflecting non-recurring events; so many people look at sales revenue as a more reliable indicator of a company's size and growth. The Price/Sales ratio, also called the "PSR", is a company's stock price divided by its annual sales per share."
moneychimp.com
"P/E vs P/S
For much of the late 1990s, the Price/Sales ratio was more important than the Price/Earnings ratio. And therefore, you needed to know the price/sales ratio of every stock you owned, by heart. Though the market is not always willing to focus on sales over earnings, it still happens when new companies have not yet achieved profitability. When that's the case, the P/S ratio is the best single indicator of what the market expects from the stock."
briefing.com
What is really important is the expected stream of future earnings, which is quite complex due to changes in total market growth, market share changes and profit margin changes. Given IBM's current share and profitability position, one must ask whether we expect them to grow earnings faster than HPQ can from a much lower starting position. As HPQ is beginning to deliver, the market is beginning to realize it may be a much better value than IBM:
siliconinvestor.com
Over time, I expect HPQ's valuation will trend up and IBM's will trend down since they are both in the same industry with roughly similar size and product offerings. Fund managers tht want representation in this industry have to look at the relative valuations and seem to be concluding that HPQ's valuation is a relative bargain compared to IBM. |
