Indianapolis Facility Expansion Will Shape Advanced Integrated Manufacturing

Key Takeaways

• Expansion into advanced medical manufacturing and automation is set to drive higher-margin growth, business stability, and improved capacity utilization over the long term.
  
• Efficiency initiatives and automation investments are strengthening cash flow generation and enabling future strategic investments and lower earnings volatility.
  
• Declining core segment performance, rising customer concentration risks, and heavy investment in new medical facilities threaten revenue stability and margin expansion amid heightened healthcare sector exposure.

Catalysts

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

• Significant investment in the new Indianapolis medical facility positions Kimball to expand into higher-value, precise, and integrated device assembly and drug delivery programs-capable of supporting hundreds of millions of dollars in annual revenue-which should drive multi-year top line growth, higher-margin sales mix, and improved capacity utilization over the long term (revenue, net margins).
  
• The growing complexity and miniaturization of electronics across medical, automotive, and industrial sectors creates sustained demand for Kimball's advanced manufacturing and automation capabilities, supporting increasing order value, long product life cycles, and potential for margin expansion as customers outsource more complex work (revenue, net margins).
  
• Strategic focus on medical contract manufacturing, including securing sole-supplier status with major customers and expanding relationships with new clients, enhances revenue diversification and business "stickiness," reducing customer concentration risk and providing greater earnings stability (revenue, earnings volatility).
  
• Ongoing investments in automation and process innovation-including a highly automated new facility-are expected to boost operating efficiency and support higher margins, while also helping mitigate labor cost pressures and positioning Kimball to capture greater wallet share from blue-chip customers as industry outsourcing rises (net margins, earnings).
  
• Ongoing working capital and inventory efficiency initiatives, which have already significantly reduced cash conversion days, are likely to further strengthen free cash flow generation and provide funding for opportunistic investments, share repurchases, or margin-accretive bolt-on acquisitions in growth markets (free cash flow, earnings per share).

Kimball Electronics Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kimball Electronics's revenue will decrease by 1.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.1% today to 2.8% in 3 years time.
• Analysts expect earnings to reach $40.8 million (and earnings per share of $1.59) by about August 2028, up from $17.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.0x on those 2028 earnings, down from 39.0x today. This future PE is lower than the current PE for the US Electronic industry at 23.0x.
• Analysts expect the number of shares outstanding to decline by 0.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.67%, as per the Simply Wall St company report.

Kimball Electronics Future Earnings Per Share Growth

Risks

• The company faces ongoing declines in Automotive and Industrial verticals, with Automotive sales down 13% year-over-year and further anticipated declines in fiscal 2026 due to the loss of a major electronic braking program; this continued segment weakness could erode total company revenue and earnings.
  
• Revenue growth prospects for the near-to-mid-term are muted, as guidance for fiscal 2026 is for a 2%–9% sales decline, and only modest growth is expected in Medical and Industrial, challenging the likelihood of substantial near-term net margin or earnings expansion.
  
• Heavy capital expenditures-forecasted at $50–$60 million in fiscal 2026, a significant increase over the prior year-focus heavily on building out the new medical facility, which could compress free cash flow and strain return on invested capital if revenue ramp-up is slower than anticipated.
  
• High customer concentration risk is evident, particularly in the Medical segment where being the sole supplier for a large customer creates exposure to program or demand volatility; loss or reduction in business from a major client could drive significant revenue and earnings volatility.
  
• The growing reliance on the Medical vertical makes the company more exposed to regulatory, compliance, and competitive risks specific to the healthcare sector, which could increase operating costs, limit pricing power, and pressure long-term margins if market dynamics shift unfavorably.

Valuation

• The analysts have a consensus price target of $27.875 for Kimball Electronics based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.4 billion, earnings will come to $40.8 million, and it would be trading on a PE ratio of 21.0x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $27.18, the analyst price target of $27.88 is 2.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.