ATA Inc (NASDAQ:ATAI), a USD$111.02M small-cap, is a consumer services company operating in an industry, which generally follows the ups and downs of the economic cycle, as its services cater to various industries across different sectors. Since revenues are generated primarily from project-work with individual clients, the lumpiness of revenues is driven by the general sentiment of the wider economy. For example, individuals are more likely to spend money on superfluous services when they feel less need to save. Consumer services analysts are forecasting for the entire industry, a strong double-digit growth of 27 percent in the upcoming year, and a whopping growth of 93 percent over the next couple of years. This rate is larger than the growth rate of the US stock market as a whole. Is now the right time to pick up some shares in consumer services companies? In this article, I’ll take you through the sector growth expectations, and also determine whether ATAI is a laggard or leader relative to its service sector peers. View our latest analysis for ATA
What’s the catalyst for ATAI's sector growth?
E-commerce remains a later driver of growth for consumer services, which enables service companies to grow share and reduce cost to serve. A crucial strategy for incumbents is to be well-positioned in response to the growing importance of pure e-commerce players, as well as building up their own capabilities around e-commerce. In the past year, the industry delivered growth in the forties, beating the US market growth of 14 percent. ATAI lags the pack with its negative growth rate of -19252 percent over the past year, which indicates the company has been growing at a slower pace than its consumer services peers. As the company trails the rest of the industry in terms of growth, ATAI may also be a cheaper stock relative to its peers.
Is ATAI and the sector relatively cheap?
Consumer services companies are typically trading at a PE of 56 times, above the broader US stock market PE of 32 times. This illustrates a somewhat overpriced sector compared to the rest of the market. However, the industry returned a similar 20 percent on equities compared to the market’s 20 percent. Since ATAI’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge ATAI’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? ATAI has been a consumer services industry laggard in the past year. If your initial investment thesis is around the growth prospects of ATAI, there are other consumer services companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how ATAI fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If ATAI has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its consumer services peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at ATAI’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into ATA's stock, take a look at the company's latest free analysis report to find out more on its financial health and other fundamentals. Interested in other service stocks instead? Use our free playform to see my list of over 100 other service companies trading on the market.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.