Investor Optimism Abounds Patterson-UTI Energy, Inc. (NASDAQ:PTEN) But Growth Is Lacking

It's not a stretch to say that Patterson-UTI Energy, Inc.'s (NASDAQ:PTEN) price-to-sales (or "P/S") ratio of 0.6x right now seems quite "middle-of-the-road" for companies in the Energy Services industry in the United States, where the median P/S ratio is around 1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Patterson-UTI Energy

How Has Patterson-UTI Energy Performed Recently?

Recent times have been advantageous for Patterson-UTI Energy as its revenues have been rising faster than most other companies. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Keen to find out how analysts think Patterson-UTI Energy's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Patterson-UTI Energy's Revenue Growth Trending?

In order to justify its P/S ratio, Patterson-UTI Energy would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company grew revenue by an impressive 73% last year. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 1.0% each year as estimated by the twelve analysts watching the company. That's shaping up to be materially lower than the 3.8% per annum growth forecast for the broader industry.

In light of this, it's curious that Patterson-UTI Energy's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

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.

When you consider that Patterson-UTI Energy's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.

It is also worth noting that we have found 2 warning signs for Patterson-UTI Energy that you need to take into consideration.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.