Price-to-Sales Ratio: The Perfect Stock Indicator

price to sales ratioThe price-to-sales ratio (P/S)  is an underappreciated valuation metric. Whereas most investors zero in on the price-to-earnings (P/E) ratio, I’m prone to focus on the price-to-sales ratio.
I like the P/S ratio because sales are more difficult to manipulate than earnings. By the time the numbers reach the bottom line, they’ve passed through a sausage grinder of qualitative interpretations.  (Accounting, though dealing with numbers, is as much art as science.)
Like the more popular P/E ratio, the price-to-sales ratio is tied to growth and profitability expectations.  A simple screen for a low-P/S-ratio stocks will tend to unearth low-growth or low-profit firms.  Therefore, I tie the P/S ratio with a growth metric.
Dividend growth is a perennial favorite. When I find dividend growth tethered to a low price-to-sales ratio (a ratio below one) I’ll take a closer look.
The following three stocks are worth a closer look: They grow the dividend and they appear cheap from a P/S-ratio perspective.
Ninety-year-old Erie Indemnity Company (NASDAQ: ERIE) writes multi-line insurance – auto, home, business, and life – in 11 states and the District of Columbia. It’s a small insurer, with a $3.7-billion market cap. It’s also a conservative, disciplined insurer. It has no long-term debt and it generates a high return on equity – double that of another little insurer, Berkshire Hathaway (NYSE: BRK.a).
Over the past 10 years, Erie’s dividend has grown to $2.54 a share from $0.97.  That’s a 10% average annual increase.  Better yet, Erie’s dividend growth comes reasonably priced: Investors can buy Erie at only 59% of trailing-12-month sales.
I’ve never played video games, but a lot of people do. Those that do have made GameStop (NYSE: GME)  the world’s largest multichannel video game retailer, with 6,488 stores in 15 countries.  Sales of $8.9 billion in 2013 are five times what was achieved in 2004.
Though GameStop’s total sales growth has plateaued in recent years, sales per share continue to grow thanks to generous dividend buybacks. GameStop generates heaps of free cash, which it uses to aggressively reduce share count.  Since 2010, shares outstanding have been reduced 29%.
This cash is also used to pay and grow a dividend. GameStop initiated a $0.15 quarterly dividend in 2012. That dividend has grown to $0.33 a share to produce a 3.4% yield. GameStop’s impressive dividend growth can be bought for 50% of trailing-12-month sales.
Is a 105-year-old company that flies under most investors’ radar worth a look? Yes, if that company is C.H. Robinson Worldwide (NASDAQ: CHRW), a leading provider of freight transportation and logistics services to more than 45,000 transportation companies around the world.
I like C.H.’s business. It’s basic, easy to understand, and invaluable. It just feels like a business that would appeal to a private-equity firm, or even to Warren Buffett.
C.H.’s business is also about growth. Over the past 10 years, its annual revenue has nearly tripled to $12.7 billion from $4.3 billion. Over the same period, the dividend has increased fivefold, to $1.40 a share from $0.26.
C.H. trades at only 61% of trailing-12-month sales, for which investors get dividend growth, a 2.7% yield, and decades of profitable operations.
These three companies are what you would call boring. But If you were to ask me to pick between these three or three high-growth non-dividend payers trading at a double-digit multiple to sales – let’s say Facebook (NASDAQ: FB), 3D Systems (NYSE: DDD), Zillow (NASDAQ: Z) –  I’ll take the former every time. I’ll always prefer underpaying to overpaying for my investments.


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