Benign Growth For Bayer Aktiengesellschaft (ETR:BAYN) Underpins Stock's 25% Plummet

Bayer Aktiengesellschaft (ETR:BAYN) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 40% in that time.

After such a large drop in price, given about half the companies operating in Germany's Pharmaceuticals industry have price-to-sales ratios (or "P/S") above 2x, you may consider Bayer as an attractive investment with its 0.4x 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 limited.

View our latest analysis for Bayer

How Has Bayer Performed Recently?

There hasn't been much to differentiate Bayer's and the industry's retreating revenue lately. It might be that many expect the company's revenue performance to degrade further, which has repressed the P/S. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value. At the very least, you'd be hoping that revenue doesn't fall off a cliff if your plan is to pick up some stock while it's out of favour.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Bayer.

Is There Any Revenue Growth Forecasted For Bayer?

The only time you'd be truly comfortable seeing a P/S as low as Bayer's is when the company's growth is on track to lag the industry.

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 2.2%. Regardless, revenue has managed to lift by a handy 8.8% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 0.9% per year as estimated by the analysts watching the company. With the industry predicted to deliver 4.7% growth per year, the company is positioned for a weaker revenue result.

With this information, we can see why Bayer is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Bayer's P/S

Bayer's recently weak share price has pulled its P/S back below other Pharmaceuticals companies. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Bayer maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Bayer, and understanding should be part of your investment process.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.