WK Kellogg Co's (NYSE:KLG) Shares Climb 26% But Its Business Is Yet to Catch Up

WK Kellogg Co (NYSE:KLG) shares have continued their recent momentum with a 26% gain in the last month alone. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Even after such a large jump in price, it's still not a stretch to say that WK Kellogg Co's price-to-sales (or "P/S") ratio of 0.7x right now seems quite "middle-of-the-road" compared to the Food industry in the United States, where the median P/S ratio is around 0.9x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for WK Kellogg Co

How WK Kellogg Co Has Been Performing

Recent times haven't been great for WK Kellogg Co as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on WK Kellogg Co.

Is There Some Revenue Growth Forecasted For WK Kellogg Co?

There's an inherent assumption that a company should be matching the industry for P/S ratios like WK Kellogg Co's to be considered reasonable.

Retrospectively, the last year delivered a decent 2.5% gain to the company's revenues. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 3.6% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Shifting to the future, estimates from the ten analysts covering the company suggest revenue growth is heading into negative territory, declining 0.9% per year over the next three years. With the industry predicted to deliver 2.8% growth per annum, that's a disappointing outcome.

With this in consideration, we think it doesn't make sense that WK Kellogg Co's P/S is closely matching its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

The Key Takeaway

WK Kellogg Co appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

While WK Kellogg Co's P/S isn't anything out of the ordinary for companies in the industry, we didn't expect it given forecasts of revenue decline. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If the poor revenue outlook tells us one thing, it's that these current price levels could be unsustainable.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for WK Kellogg Co that you should be aware of.

If you're unsure about the strength of WK Kellogg Co's 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.