Sovos Brands , which owns the pasta sauce brand Rao’s, is “full of pasta-bility while making sauce and cents,” according to Needham. The firm believes Rao’s could grow more than 75% over the next three to four years and become a $1 billion brand. “Growth in pasta sauce coupled with brand extension into adjacent categories provides ample opportunity for Rao’s brand growth,” analyst Matt McGinley wrote in a Wednesday note. McGinley initiated a buy rating on Sovos shares. He set his price target to $22.50 per share, implying shares could rally nearly 22% from Tuesday’s close. “While we expect the Rao’s brand to generate the majority of Sovos’ growth, we think it benefits from operating multiple brands, as [that will] allow it to leverage its manufacturing and distribution, and provide cross-selling opportunities that can drive scale efficiencies and push the operating margin higher,” he continued. Needham said the company is well-positioned for mergers and acquisitions thanks to its healthy balance sheet. McGinley noted that Sovos has an “asset-light production model” that will allow it to generate strong cash flow. The analyst estimated Sovos could sustain double-digit topline growth. “With operating leverage driving margin expansion, EBITDA and cash flow will grow faster than the top line, in our view. We expect operating leverage, mix, and productivity gains to push [gross margin] from 28% in ’22 to > 30% over the next 1-2 years,” said McGinley. Sovos shares have jumped aobut 29% year to date. The stock was up more than 1% in trading Wednesday. —CNBC’s Michael Bloom contributed to this report.
