WK Kellogg Co’s (NYSE:KLG) 28% price rise doesn’t match its sales

WK Kellogg Co (NYSE:KLG) Shareholders’ patience was rewarded with a 28% increase in the share price over the last month. Looking back a little further, it’s encouraging to see that the stock is up 85% in the last year.

Although the price has increased, it is still not an exaggeration to say that WK Kellogg Co’s current price-to-sales ratio (or “P/S”) of 0.7x appears to be rather “mediocre” compared to that Food industry in the United States, where the median P/S ratio is approximately 0.9x. However, it is not advisable to simply ignore the P/E ratio without explanation, as investors may be ignoring a clear opportunity or a costly mistake.

Check out our latest analysis for WK Kellogg Co

What is WK Kellogg Co’s recent performance?

WK Kellogg Co could do better as its sales have been declining recently while most other companies have seen positive sales growth. It could be that many are expecting the weak sales performance to turn positive, which has prevented a decline in the P/E ratio. However, if this isn’t the case, investors could get caught paying too much for the stock.

If you want to see what analysts are predicting for the future, you should check out our free Report on WK Kellogg Co.

How is WK Kellogg Co’s sales growth developing?

WK Kellogg Co’s P/E ratio would be typical of a company that is only expected to deliver moderate growth and, more importantly, perform in line with the industry.

When we reviewed the last financial year, we were disheartened to see that the company’s revenue fell by 2.5%. This has spoiled the last three-year period, which still managed to achieve a decent overall sales increase of 11%. So, first of all, we can confirm that the company has generally done a good job of increasing sales during this time, although there have been some hiccups along the way.

Looking ahead, the next three years are likely to bring lower returns, with revenue expected to fall 0.2% per year, according to estimates from the eight analysts covering the company. Given that the industry is forecast to grow by 3.0% annually, this is a disappointing result.

Based on this information, we find it concerning that WK Kellogg Co is trading at a fairly similar P/E ratio compared to the industry. Apparently, many of the company’s investors reject the pessimism of the analyst cohort and are currently unwilling to let go of their shares. There’s a good chance that these shareholders are setting themselves up for future disappointment if the P/E ratio falls to a level more in line with the negative growth outlook.

The bottom line on the P/S of WK Kellogg Co

The company’s shares have risen significantly and WK Kellogg Co’s P/E ratio is now back in line with the industry average. While the price-to-sales ratio shouldn’t be the deciding factor in whether or not you buy a stock, it is still a very meaningful barometer of sales expectations.

Our review of WK Kellogg Co’s analyst forecasts found that the prospect of falling revenue isn’t driving down its P/E ratio as much as we would have expected. When we see a gloomy outlook like this, we immediately assume that the share price is at risk of falling, negatively impacting the P/E ratio. If we consider the revenue outlook, the P/E ratio seems to suggest that potential investors may be paying a premium for the stock.

We don’t want to spoil the parade too much, but we found it 2 warning signs for WK Kellogg Co what you need to pay attention to.

If companies with a history of solid earnings growth are right for youmaybe you would like to see this free Collection of other companies with strong earnings growth and low P/E ratios.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.