Optimistic Investors Push Hornby PLC (LON:HRN) Shares Up 27% But Growth Is Lacking

Those holding Hornby PLC (LON:HRN) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Looking back a bit further, it's encouraging to see the stock is up 37% in the last year.

In spite of the firm bounce in price, it's still not a stretch to say that Hornby's price-to-sales (or "P/S") ratio of 0.8x right now seems quite "middle-of-the-road" compared to the Leisure industry in the United Kingdom, seeing as it matches the P/S ratio of the wider industry. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Hornby

What Does Hornby's Recent Performance Look Like?

We'd have to say that with no tangible growth over the last year, Hornby's revenue has been unimpressive. One possibility is that the P/S is moderate because investors think this benign revenue growth rate might not be enough to outperform the broader industry in the near future. If not, then existing shareholders may be feeling hopeful about the future direction of the share price.

Although there are no analyst estimates available for Hornby, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like Hornby's is when the company's growth is tracking the industry closely.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Regardless, revenue has managed to lift by a handy 16% in aggregate from three years ago, thanks to the earlier period of growth. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 11% shows it's noticeably less attractive.

With this in mind, we find it intriguing that Hornby's P/S is comparable to that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From Hornby's P/S?

Hornby's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Hornby revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

You should always think about risks. Case in point, we've spotted 4 warning signs for Hornby you should be aware of, and 2 of them are a bit concerning.

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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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.

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