Price to Sales

The price-to-sales ratio of the stock is measured relative to the price-to-sales of the S&P Industrial Index, to provide a long-term measurement of relative valuation. Since valuation, relative to sales, tends to follow the direction of the margins, low relative price-to-sales when the margin is low and rising, implies an increased chance of higher valuation in the future. Using the Motorola example, when sales growth and margins began to rise in early 1992, the relative price to sales of the company was near to its low. Rising sales growth and rising margins, along with unusually low valuation relative to sales, were important components of the GEARS buy decision in June of 1992.

Similarly, a high relative price-to-sales when margins are high and falling, implies an increased chance of lower valuation in the future. In the case of Motorola, when the gross margin began to decline in late 1995, the relative price-to-sales was near the highest in the company history. Unusually extended relative valuation and deteriorating gross margins were two important components of GEARS April 1994 sell decision.

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