Course 408: Cyclical Stocks
How Does the Price/Sales Ratio Compare with Historical Levels?
In this course
1 Introduction
2 How Is the Company Doing Now?
3 How Wildly Do Sales and Profits Fluctuate?
4 How Leveraged Is the Balance Sheet?
5 Does the Company Consistently Generate Positive Cash Flow?
6 How Steady Are the Company's Dividends over a Cycle?
7 Is the Firm Diversified Geographically and by Product Line?
8 Is the Long-Term Trend in Sales and Profits Upward?
9 How Has the Stock Performed?
10 How Expensive Is It?
11 How Expensive Is the Company Based on Normalized Earnings?
12 How Does the Price/Sales Ratio Compare with Historical Levels?
13 Conclusion: Get 'Em while They're Cold

Another good way to value a cyclical is to look at the price/sales ratio. Earnings bounce up and down, making P/E ratios erratic from year to year. Sales are much steadier than profits--even for a cyclical--thus making the price/sales ratio a pretty reliable guide to fluctuations in value over time. In terms of its price/sales ratio, United Technologies is more expensive than its historical average. At the end of 1999, it traded for 1.2 times sales, compared with 0.5 times in 1995. Although the company expanded its sales rapidly in the 1990s, its market value zipped up even faster, suggesting that now is not the best time to bet on United Technologies if you're looking for a bargain.

Next: Conclusion: Get 'Em while They're Cold >>


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