Investor Optimism Abounds TransUnion (NYSE:TRU) But Growth Is Lacking

When you see that almost half of the companies in the Professional Services industry in the United States have price-to-sales ratios (or "P/S") below 1.3x, TransUnion (NYSE:TRU) looks to be giving off strong sell signals with its 3.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for TransUnion

How TransUnion Has Been Performing

Recent times haven't been great for TransUnion as its revenue has been rising slower than most other companies. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Is There Enough Revenue Growth Forecasted For TransUnion?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like TransUnion's to be considered reasonable.

Retrospectively, the last year delivered a decent 5.0% gain to the company's revenues. The latest three year period has also seen an excellent 40% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 6.6% each year during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 7.5% per year, which is not materially different.

With this information, we find it interesting that TransUnion is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

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.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that TransUnion currently trades on a higher than expected P/S. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 1 warning sign for TransUnion that you should be aware of.

If you're unsure about the strength of TransUnion's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.