Frequency Electronics, Inc. (NASDAQ:FEIM) Stock Rockets 52% As Investors Are Less Pessimistic Than Expected

The Frequency Electronics, Inc. (NASDAQ:FEIM) share price has done very well over the last month, posting an excellent gain of 52%. The last month tops off a massive increase of 100% in the last year.

In spite of the firm bounce in price, it's still not a stretch to say that Frequency Electronics' price-to-sales (or "P/S") ratio of 2.4x right now seems quite "middle-of-the-road" compared to the Electronic industry in the United States, where the median P/S ratio is around 2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Frequency Electronics

How Frequency Electronics Has Been Performing

With revenue growth that's exceedingly strong of late, Frequency Electronics has been doing very well. Perhaps the market is expecting future revenue performance to taper off, which has kept the P/S from rising. Those who are bullish on Frequency Electronics will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Frequency Electronics' earnings, revenue and cash flow.

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Frequency Electronics would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company grew revenue by an impressive 36% last year. Still, revenue has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

This is in contrast to the rest of the industry, which is expected to grow by 7.8% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Frequency Electronics is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

Frequency Electronics' stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Frequency Electronics' average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

It is also worth noting that we have found 1 warning sign for Frequency Electronics that you need to take into consideration.

If these risks are making you reconsider your opinion on Frequency Electronics, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com