Electrification And Reshoring Will Unlock New Medical Manufacturing Avenues

Key Takeaways

• New medical facility and phased growth strategy could rapidly boost medical revenue and margins, unlocking large new business opportunities.
  
• Focus on automation, supply chain resilience, and electrification positions the company for margin expansion, rebound in revenue, and sustained competitive advantage across key markets.
  
• Heavy customer concentration, global supply chain risks, industry commoditization, slow technological adoption, and rising regulatory costs threaten profitability and long-term growth.

Catalysts

Engages in the provision of electronics manufacturing, engineering, and supply chain support services to customers in the automotive, medical, and industrial end markets.

• Analyst consensus acknowledges upside from the new Indianapolis medical facility and a focus on the CMO, but growing customer traction and careful phased-in ramp (with limited upfront cost drag) could accelerate a step-change in medical segment revenue and margins sooner than expected, especially as management confirms major new business is only possible at the expanded site.
  
• While analysts expect cost optimization from divestitures and plant closures, they may undervalue the potential for significant gross margin improvement if inventory and cash conversion days continue to decline at the current aggressive rate and digital/automation initiatives yield sustained cost savings across the operating base.
  
• Kimball is likely to be a direct beneficiary of the long-term global move to electrification and automation-especially in automotive and industrial-where pipeline momentum for new platforms (such as EV braking and power electronics) may enable a sharp rebound in revenue growth as existing customer inventory correction cycles end.
  
• Investments and leadership in medical device manufacturing position the company to capture share in mission-critical, value-added assemblies and drug-device combinations, which offer higher regulatory barriers, longer product cycles, and the potential for compound revenue growth and structurally higher blended margins.
  
• Continued emphasis on supply chain resilience and manufacturing localization gives Kimball an outsized opportunity to win new, sticky business with multinationals seeking to diversify or reshore their EMS volumes, which could drive meaningful expansion in the customer base, facility utilization, and long-term earnings power.

Kimball Electronics Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Kimball Electronics compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Kimball Electronics's revenue will decrease by 3.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 1.2% today to 1.9% in 3 years time.
• The bullish analysts expect earnings to reach $25.9 million (and earnings per share of $1.01) by about July 2028, up from $17.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 27.3x on those 2028 earnings, up from 26.4x today. This future PE is greater than the current PE for the US Electronic industry at 23.8x.
• Analysts expect the number of shares outstanding to decline by 1.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.56%, as per the Simply Wall St company report.

Kimball Electronics Future Earnings Per Share Growth

Risks

• The company's over-reliance on a small number of large customers in the medical and automotive verticals creates significant concentration risk, exposing future revenues to volatility if these customers scale back orders or switch vendors.
  
• Kimball Electronics operates with a substantial manufacturing footprint in China and North America, making it vulnerable to rising geopolitical tensions, tariff uncertainties, and supply chain disruptions that could compress operating margins and increase costs over the long term.
  
• Persistent commoditization in the electronics manufacturing services industry, along with ongoing global component shortages and price competition, may continue to exert downward pressure on gross margins and overall earnings quality.
  
• The company's ability to secure and scale high-margin, next-generation contracts is challenged by competition with larger EMS players, and its relatively slow adoption of advanced automation and digitalization could impede long-term revenue growth and margin expansion.
  
• Increasing regulatory scrutiny, climate regulations, and ESG-related capital expenditure requirements are expected to raise compliance and operational costs, tightening net margins and impacting the company's competitiveness in the years ahead.

Valuation

• The assumed bullish price target for Kimball Electronics is $24.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Kimball Electronics's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $24.0, and the most bearish reporting a price target of just $12.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $1.4 billion, earnings will come to $25.9 million, and it would be trading on a PE ratio of 27.3x, assuming you use a discount rate of 8.6%.
• Given the current share price of $19.4, the bullish analyst price target of $24.0 is 19.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.