AerCap Holdings N.V.'s (NYSE:AER) price-to-sales (or "P/S") ratio of 2.2x may not look like an appealing investment opportunity when you consider close to half the companies in the Trade Distributors industry in the United States have P/S ratios below 1.3x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.
NYSE:AER Price to Sales Ratio vs Industry April 3rd 2024
How AerCap Holdings Has Been Performing
Recent revenue growth for AerCap Holdings has been in line with the industry. One possibility is that the P/S ratio is high because investors think this modest revenue performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Want the full picture on analyst estimates for the company? Then our free report on AerCap Holdings will help you uncover what's on the horizon.
Do Revenue Forecasts Match The High P/S Ratio?
In order to justify its P/S ratio, AerCap Holdings would need to produce impressive growth in excess of the industry.
Taking a look back first, we see that the company managed to grow revenues by a handy 9.5% last year. This was backed up an excellent period prior to see revenue up by 69% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.
Turning to the outlook, the next three years should generate growth of 1.2% per year as estimated by the six analysts watching the company. With the industry predicted to deliver 6.2% growth per year, the company is positioned for a weaker revenue result.
With this information, we find it concerning that AerCap Holdings is trading at a P/S higher than the industry. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.
The Final Word
Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
Despite analysts forecasting some poorer-than-industry revenue growth figures for AerCap Holdings, this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.
It is also worth noting that we have found 3 warning signs for AerCap Holdings (2 are concerning!) that you need to take into consideration.
It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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