Sovos Brands, Inc. (NASDAQ:SOVO) Stock Rockets 27% As Investors Are Less Pessimistic Than Expected

Simply Wall St ·  09/02/2023 03:12

Sovos Brands, Inc. (NASDAQ:SOVO) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 50% in the last year.

Following the firm bounce in price, given close to half the companies operating in the United States' Food industry have price-to-sales ratios (or "P/S") below 0.9x, you may consider Sovos Brands as a stock to potentially avoid with its 2.4x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Sovos Brands

NasdaqGS:SOVO Price to Sales Ratio vs Industry September 1st 2023

How Has Sovos Brands Performed Recently?

Sovos Brands certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Do Revenue Forecasts Match The High P/S Ratio?

Sovos Brands' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 21%. The latest three year period has also seen an excellent 68% overall rise in revenue, aided 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 ten analysts covering the company suggest revenue should grow by 5.9% over the next year. Meanwhile, the rest of the industry is forecast to expand by 4.0%, which is not materially different.

With this information, we find it interesting that Sovos Brands 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. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

What We Can Learn From Sovos Brands' P/S?

Sovos Brands' P/S is on the rise since its shares have risen strongly. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that Sovos Brands 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. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

You always need to take note of risks, for example - Sovos Brands has 1 warning sign we think you should be aware of.

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

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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.

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