Jazz Pharmaceuticals plc (NASDAQ:JAZZ) Looks Inexpensive But Perhaps Not Attractive Enough

Jazz Pharmaceuticals plc's (NASDAQ:JAZZ) price-to-sales (or "P/S") ratio of 1.7x might make it look like a buy right now compared to the Pharmaceuticals industry in the United States, where around half of the companies have P/S ratios above 3x and even P/S above 11x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Jazz Pharmaceuticals

What Does Jazz Pharmaceuticals' Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Jazz Pharmaceuticals has been relatively sluggish. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

Want the full picture on analyst estimates for the company? Then our free report on Jazz Pharmaceuticals will help you uncover what's on the horizon.

Do Revenue Forecasts Match The Low P/S Ratio?

Jazz Pharmaceuticals' P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.9% last year. The latest three year period has also seen an excellent 49% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 6.0% per year over the next three years. With the industry predicted to deliver 17% growth each year, the company is positioned for a weaker revenue result.

With this in consideration, its clear as to why Jazz Pharmaceuticals' P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Jazz Pharmaceuticals' analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. The company will need a change of fortune to justify the P/S rising higher in the future.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Jazz Pharmaceuticals (1 is a bit concerning) you should be aware of.

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.