Over the past six months, Kimball Electronics’s shares (currently trading at $25.40) have posted a disappointing 18.4% loss, well below the S&P 500’s 7.5% gain. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
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Why Do We Think Kimball Electronics Will Underperform?
Despite the more favorable entry price, we don’t have much confidence in Kimball Electronics. Here are three reasons we avoid KE, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Kimball Electronics’s sales grew at a sluggish 2.9% compounded annual growth rate over the last five years. This was below our standards.
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.
Sadly for Kimball Electronics, its EPS declined by 6.4% annually over the last five years while its revenue grew by 2.9%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
While Kimball Electronics’s free cash flow broke even this quarter, the broader story hasn’t been so clean. Kimball Electronics’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 1.1%, meaning it lit $1.10 of cash on fire for every $100 in revenue.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Kimball Electronics, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 18.7× forward P/E (or $25.40 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. We’d recommend looking at one of our top software and edge computing picks.
Stocks We Would Buy Instead of Kimball Electronics
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