BUSINESS
Kimball Electronics, Inc. provides contract electronics manufacturing services and diversified manufacturing services to customers in the automotive, medical, industrial, and public safety end markets. The company’s manufacturing services include design services and support, supply chain services and support, and rapid prototyping and product introduction support services, as well as product design, and process validation and qualification services.
INVESTMENT RATING
With future capital returns forecasted to exceed the cost of capital, KE is expected to continue to be a modest Value Builder.
Kimball Electronics has a current Value Trend Rating of D (Negative). With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing very contradictory signals. Kimball Electronics has a good Appreciation Score of 76 but a very low Power Rating of 11, resulting in the Negative Value Trend Rating.
Kimball Electronics’ stock is selling well below targeted value. The current stock price of $21.46 compares to targeted value 12 months forward of $44.
Kimball Electronics’ high appreciation potential results in an appreciation score of 76 (only 24% of the universe has greater appreciation potential.)
Kimball Electronics has a Power Rating of 11. (KE’s very low Power Rating indicates that it only has a higher likelihood of achieving favorable investment performance over the near to intermediate term than 11% of companies in the universe.) Factors contributing to this very low Power Rating include: the trend in KE’s earnings estimates has been unfavorable in recent months; recent price action has been unfavorable; and the Semiconductor, Related Devices comparison group is currently in an unfavorable position.
INVESTMENT PROFILE
KE’s financial strength is average. Financial strength rating is 45.
Relative to the S&P 500 Composite, Kimball Electronics Inc has slightly more Value than Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that KE is normal risk. Relative weaknesses include: low forecasted profitability, low historical profitability, low financial strength, and high stock price volatility. KE’s valuation is low: low dividend yield, low P/E ratio, and low price/book ratio. KE has unusually low market capitalization.
CURRENT SIGNALS
Kimball Electronics’ current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; rising tax keep rate; and rising leverage.
Kimball Electronics’ current technical position is very weak. The stock price is in a 6.5 month down move. The stock has declined 25.7% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.
ALERTS
Marginal negative changes in Kimball Electronics Inc (NASDAQ: KE) fundamentals have recently occurred: significant quarterly earnings deceleration occurred. The stock is currently rated D. Kimball Electronics Inc (NASDAQ: KE) stock closed at $21.46 on 4/4/24 after a slight decline of -0.6%. However, unusually low trading volume at 65% of normal accompanied the decline. The stock has risen 3.2% during the last week but has been weak relative to the market over the last nine months.CASH FLOW
In 2023, Kimball Electronics experienced a significant decline in cash of -$5.9 million (-11%). Sources of cash were lower than uses. Cash generated from 2023 EBITDA totaled +$119.9 million. Non-operating sources contributed +$3.5 million (+3% of EBITDA). Cash taxes consumed -$18.9 million (-16% of EBITDA). Re-investment in the business amounted to -$209.2 million (-174% of EBITDA). On a net basis, debt investors supplied +$84.6 million (+71% of EBITDA) while equity investors contributed +$14.2 million (+12% of EBITDA).
Kimball Electronics’ Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Kimball Electronics Peer Group. In most years, Kimball Electronics was in the top quartile and lower quartile. Currently, Kimball Electronics is upper quartile at +3% of EBITDA (+$3.5 million).
Kimball Electronics’ Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Kimball Electronics Peer Group. In most years, Kimball Electronics was in the top quartile and second quartile. Currently, Kimball Electronics is slightly above median at -16% of EBITDA (-$18.9 million).
Kimball Electronics’ Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Kimball Electronics Peer Group. In most years, Kimball Electronics was in the lower quartile and top quartile. Currently, Kimball Electronics is lower quartile at -174% of EBITDA (-$209.2 million).
Kimball Electronics’ Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Kimball Electronics Peer Group. In most years, Kimball Electronics was in the top quartile and second quartile. Currently, Kimball Electronics is upper quartile at +71% of EBITDA (+$84.6 million).
Kimball Electronics’ Equity Investors, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Kimball Electronics Peer Group. In most years, Kimball Electronics was in the top quartile and second quartile. Currently, Kimball Electronics is upper quartile at +12% of EBITDA (+$14.2 million).
Kimball Electronics’ Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Kimball Electronics Peer Group. In most years, Kimball Electronics was in the top quartile and third quartile. Currently, Kimball Electronics is below median at -5% of EBITDA (-$5.9 million).
Kimball Electronics’ Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Kimball Electronics Peer Group as well. In most years, Kimball Electronics was in the second quartile and third quartile. Currently, Kimball Electronics is at median at +3%.
PROFITABILITY
Kimball Electronics’ return on equity has improved modestly since 2014. The current level of 10.0% is 1.02X the low for the period and is -22.3% from the high.
This modest improvement was due to strong negative trend in pretax operating return offset by very strong positive trend in non-operating factors.
The productivity of Kimball Electronics’ assets declined over the full period 2014-2023: asset turnover has suffered a strong overall downtrend.
Reinforcing this trend, pretax margin has experienced a downtrend although it experienced a very sharp recovery after the 2022 low.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
Kimball Electronics’ return on equity is slightly below median (10.0%) for the four quarters ended December, 2023.
Operating performance (pretax return on assets) is slightly below median (5.7%) reflecting asset turnover that is at median (1.44X) and at median pretax margin (4.0%).
Tax “keep” rate (income tax management) is below median (75.0%) resulting in after tax return on assets that is below median.
Financial leverage (leverage) is slightly below median (2.33X).
GROWTH RATES
There are no significant differences between Kimball Electronics’ longer term growth and growth in recent years. Kimball Electronics’ historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.Annual revenue growth has been 11.4% per year.
Total asset growth has been 14.2% per year.
Annual E.P.S. growth has been 9.1% per year.
Equity growth has been 9.0% per year.
Kimball Electronics’ consensus growth rate forecast (average of Wall Street analysts) is 20.0% — substantially above the average of the historical growth measures.
Relative to the Kimball Electronics Peer Group, Kimball Electronics’ historical growth measures are erratic. Equity growth (9.0%) has been at the upper quartile. Total asset growth (14.2%) has been at the upper quartile. Revenue growth (11.4%) has been above median. E.P.S. growth (9.1%) has been substantially below median.
Consensus growth forecast (20.0%) is upper quartile.
PRICE HISTORY
Over the full time period, Kimball Electronics’ stock price performance has been variable and in line with the market. Between October, 2014 and April, 2024, Kimball Electronics’ stock price rose +137%; relative to the market, this was a -7% loss. Significant price moves during the period: 1) September, 2020 – March, 2021: +123%; and 2) January, 2016 – October, 2017: +119%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -10.0% is lower quartile relative to the S&P 500 Composite. In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through February, 2024 of -10.0% is substantially below median relative to Kimball Electronics Inc Peer Group.
Current 5-year total return performance of 7.7% is below median relative to the S&P 500 Composite.
Through February, 2024, with below median current 5-year total return of 7.7% relative to S&P 500 Composite, Kimball Electronics’ total return performance is slightly below median relative to Kimball Electronics Inc Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, KE’s overall valuation is exceptionally low. All five factors are lower quartile. The highest factor is the ratio of enterprise value/earnings before interest and taxes, followed by the ratio of enterprise value/assets, then by the price/earnings ratio, then by the price/equity ratio. The lowest factor is the ratio of enterprise value/revenue.
Relative to Kimball Electronics Peer Group, KE’s overall valuation is quite low. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is at the lower quartile. Price/earnings ratio is at the lower quartile. Ratio of enterprise value/revenue is lower quartile. Ratio of enterprise value/assets is lower quartile. The lowest factor, the price/equity ratio, is at the lower quartile.
Kimball Electronics has a major value gap compared to the median. For KE to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.46X to 0.76X. If KE’s ratio of enterprise value/revenue were to rise to 0.76X, its stock price would be higher by $22 to $44. For KE to achieve upper quartile valuation relative to the Kimball Electronics Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 0.46X to 0.91X. If KE’s ratio of enterprise value/revenue were to rise to 0.91X, its stock price would increase by $33 from the current level of $21.
VALUE TARGETS
With future capital returns forecasted to exceed the cost of capital, KE is expected to continue to be a modest Value Builder.
Kimball Electronics’ current Price Target of $47 represents a +117% change from the current price of $21.46.
This high appreciation potential results in an appreciation score of 76 (only 24% of the universe has greater appreciation potential.)
Notwithstanding this high Appreciation Score of 76, the low Power Rating of 11 results in an Value Trend Rating of D.
Kimball Electronics’ current Price Target is $47 (+31% from the 2023 Target of $36 and +117% from the 04/04/24 price of $21.46). This rise in the Target is the result of a +17% increase in the equity base and a +12% increase in the price/equity multiple. The forecasted increase in cost of equity has a very large negative impact on the price/equity multiple and the forecasted decline in growth has a very slight negative impact as well. More than offsetting these Drivers, the forecasted increase in return on equity has a very large positive impact.
PTR’s return on equity forecast is 8.8% — in line with our recent forecasts. Forecasted return on equity exhibited a slight, erratic increase between 2015 and 2023. The current forecast is above the 2018 low of 6%.
PTR’s growth forecast is 13.0% — in line with our recent forecasts. Forecasted growth enjoyed a dramatic, variable increase between 2015 and 2023. The current forecast is well above the 2015 low of 7%.
PTR’s cost of equity forecast is 7.1% — in line with recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2015 and 2023. The current forecast is above the 2015 low of 4.5%.
At Kimball Electronics’ current price of $21.46, investors are placing a negative value of $-8 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 14.0% per year, and a return on equity of 7.4% versus a cost of equity of 6.3%.
PTR’s 2025 Price Target of $47 is based on these forecasts and reflects an estimated value of existing assets of $25 and a value of future investments of $22.
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