If a company has been able to grow its revenues over the last several quarters, it may be a sign of strong future growth. However, investors should be careful not to assume that future growth is a fait accompli, or that revenues will even stabilize at current high levels. While we've often discussed how investors should interpret one-time losses, occassionally one-time gains can occur as well.
Consider Alpha Pro Tech (NYSEMKT:APT), maker of a slew of protective products, from medical masks to roof underlay. The following chart depicts the company's revenues over the last several years: (Click to enlarge)
Not only does the company's revenue growth appear unsustainable, but so does its revenue level. The company benefited in 2009 from responses to the H1N1 virus, which resulted in sales growth of its medical masks of 283%! This alone boosted sales by $13 million in 2009, and is not likely to continue, as the company's president noted that
...face mask sales started to slow down in the latter part of the fourth quarter and are expected to return to pre-H1N1 levels in 2010, unless concerns relating to the global H1N1 Influenza A pandemic resume.
That's not to say APT does not have a bright future. It's building products (underlayment and house wrap) are gaining share and growing distribution in an otherwise poor building environment. Furthermore, mask sales represent only a portion of the company's total sales, and the company's other protective products show potential to continue to grow.
But the lesson is that investors should not blindly incorporate a company's latest revenue figures as a company's new normal. Instead, investors should attempt to understand the nature of a company's products in order to arrive at a more accurate normalized revenue figure for valuation purposes. Otherwise, the investor's attempt to identify undervalued stocks may prove fruitless.