Coherent Corp.'s (NYSE:COHR) 29% Price Boost Is Out Of Tune With Revenues

Simply Wall St · 10/16 13:21

Coherent Corp. (NYSE:COHR) shareholders have had their patience rewarded with a 29% share price jump in the last month. The annual gain comes to 196% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, given close to half the companies operating in the United States' Electronic industry have price-to-sales ratios (or "P/S") below 2x, you may consider Coherent as a stock to potentially avoid with its 3.3x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Coherent

ps-multiple-vs-industry
NYSE:COHR Price to Sales Ratio vs Industry October 16th 2024

How Has Coherent Performed Recently?

Recent times haven't been great for Coherent as its revenue has been falling quicker than most other companies. It might be that many expect the dismal revenue performance to recover substantially, which has kept the P/S 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 Coherent will help you uncover what's on the horizon.

Do Revenue Forecasts Match The High P/S Ratio?

Coherent'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 a frustrating 8.8% decrease to the company's top line. Still, the latest three year period has seen an excellent 52% overall rise in revenue, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 12% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 12% per annum, which is not materially different.

With this information, we find it interesting that Coherent is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On Coherent's P/S

Coherent shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Given Coherent's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. 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. A positive change is needed in order to justify the current price-to-sales ratio.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Coherent with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Coherent, explore our interactive list of high quality stocks to get an idea of what else is out there.