Revenues Not Telling The Story For Mothercare plc (LON:MTC) After Shares Rise 26%
The Mothercare plc (LON:MTC) share price has done very well over the last month, posting an excellent gain of 26%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 19% in the last twelve months.
Even after such a large jump in price, there still wouldn't be many who think Mothercare's price-to-sales (or "P/S") ratio of 0.5x is worth a mention when the median P/S in the United Kingdom's Specialty Retail industry is similar at about 0.3x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
Check out our latest analysis for Mothercare
What Does Mothercare's P/S Mean For Shareholders?
While the industry has experienced revenue growth lately, Mothercare's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting its poor revenue performance to improve, keeping the P/S from dropping. However, if this isn't the case, investors might get caught out paying too much for the stock.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Mothercare.
Is There Some Revenue Growth Forecasted For Mothercare?
The only time you'd be comfortable seeing a P/S like Mothercare's is when the company's growth is tracking the industry closely.
Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 20%. As a result, revenue from three years ago have also fallen 41% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
Looking ahead now, revenue is anticipated to slump, contracting by 1.4% during the coming year according to the three analysts following the company. Meanwhile, the broader industry is forecast to expand by 5.4%, which paints a poor picture.
With this in consideration, we think it doesn't make sense that Mothercare's P/S is closely matching its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.
The Final Word
Mothercare's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.
Our check of Mothercare's analyst forecasts revealed that its outlook for shrinking revenue isn't bringing down its P/S as much as we would have predicted. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If the declining revenues were to materialize in the form of a declining share price, shareholders will be feeling the pinch.
Before you take the next step, you should know about the 6 warning signs for Mothercare (3 don't sit too well with us!) that we have uncovered.
If you're unsure about the strength of Mothercare'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.
