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Over the past six months, Kimball Electronics’s shares (currently trading at $17.31) have posted a disappointing 9% loss while the S&P 500 was flat. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Kimball Electronics, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Kimball Electronics Will Underperform?
Even with the cheaper entry price, we're swiping left on Kimball Electronics for now. Here are three reasons why there are better opportunities than KE and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Kimball Electronics grew its sales at a sluggish 4.5% compounded annual growth rate. This was below our standard for the industrials sector.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Kimball Electronics’s full-year EPS dropped 67.1%, or 13.7% annually, over the last four years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Kimball Electronics’s low margin of safety could leave its stock price susceptible to large downswings.
3. Breakeven Free Cash Flow Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Kimball Electronics broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.
Final Judgment
Kimball Electronics doesn’t pass our quality test. Following the recent decline, the stock trades at 16.4× forward P/E (or $17.31 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. We’d suggest looking at a top digital advertising platform riding the creator economy.
Stocks We Would Buy Instead of Kimball Electronics
Donald Trump’s victory in the 2024 U.S. Presidential Election sent major indices to all-time highs, but stocks have retraced as investors debate the health of the economy and the potential impact of tariffs.